If the cost of private money financing is so much more expensive than institutional lending, then why use hard money? What are the advantages, if any, to private money loans?
These are important questions that need to be asked and answered. While rate, cost, and terms are advantages to Fannie Mae or Freddie Mac institutional mortgages, many borrowers do not fit into the strict guidelines that are now dictated by conventional lenders. So, while borrowers would prefer the less expensive route, most would prefer to have the real estate investment, the tax relief, and the security of homeownership, versus missing the opportunity altogether.
Additionally, there are advantages to private money loans.
First, there is the paperwork requirements and loan conditions. While banks seek several years of tax returns, rental income history, seasoned downpayment, proof of reserves, strong debt-to-income ratios and consistent earnings, private investors rarely need such items. Rather, private investors seek a strong equity position, typically 40% or more, and clear title.
Second, the credit requisites. Typically, banks want to see a Fico score minimum. Some borrowers get derailed due to this issue, because of a divorce, unexpected medical expense or loss of a job. Some are instructed to wait three or more years due to a short sale, bankruptcy or foreclosure in their past. Private money lenders will look at these flaws, but with much less interest. Again, the substantial equity position and clear title are considerably more important.
Third, the timing involved. Private lenders are typically much quicker from application to funding than institutional lenders. Banks and brokers require a myriad of paperwork and conditions to be met. Files get sent into a pipeline where they are reviewed. This often becomes a bureaucratic nightmare, often delaying files. Many of the loan officers I work with tell me that 45 days is now the norm. Private lending takes 10 working days or less, for the most part. Many times, short sales or troubled Sellers do not have the time to wait for a 45 day conventional closing.
For more information and advantages of Private Money Lending, feel free to reach out to us at 760-845-9035.
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