Private Money Loan

Gustan Cho Associates

Advice On How To Qualify For Private Money Loan

The Most Important Step is to know the general rules most Private Lenders and Hard Money Lenders use as a guiding principle to making private money loan. These are generalized and different lenders will have different “niche” products, and may vary from what you are about to read. However knowing and understanding the “3 Golden Rules of Private and Hard Money Lending” is good start to learning the thought process of how such lenders underwrite their lending decisions. In essence to be successful at getting a Private or Hard Money Loan it is important to understand how the actual lenders think.

Getting Approved For Private Money Loan

In a previous article I talked about the “3 Golden Rules” of the Private Money Lender, and Hard Money Lender.

Here they are:

1. if you have a lot of equity on you single family home, 1-4 unit, or commercial property, they will lend you money, and

2. If you have a good exit strategy or purpose for borrowing the money, you are more likely to get the loan. For example: you need the money to buy another property that you are going to fix up and “flip,” or you need to fix the property you are borrowing money on so you can sell it.

3. You are going to pay a higher rate than you would at a bank which is typically from 12-15% as opposed to 4.5-5.5%.  So, reflect back to “Golden Rule” number 2 because you will have to demonstrate to the Private Money Lender or Hard Money Lender why borrowing the money at higher rate will improve your overall financial position. The Private Money Lender and Hard Money Lenders want you to make money so you can keep coming back and borrowing more money. They don’t want to be foreclosing and having their attorneys make money.

Qualification Requirements For Private Money Loan

Let’s look at the first Golden Rule of Private Money Loan and Hard Money Loan and how I qualify for private money loan.

A borrower has a rental property worth $200,000. He has a mortgage for $50,000 and needs $50,000 to buy a house that he wants to rehab and flip. He needs $100,000 which is 50% of $200,000. He has a loan to value of 50%, and therefore has 50% equity.

I the above example the borrower has a lot of equity. According to the first rule this looks like a good deal.

To further evaluate the equity position of the lender they are going to look at the surrounding neighborhood to make sure the subject property is not in a complete war zone. They are probably going to ask a Realtor or 3rd party inspection service for a BPO or Broker Price Opinion with interior photos. In some cases they may want an actual appraisal. All of these types of property evaluations will be at the borrower’s cost. The cost of such services. The BPO is the most cost efficient.

 How Are You Going To Pay Off Your Private Money Loan?

The second rule protects both the Private Money Loan and Hard Money Loan Lender and the borrower. It’s just not good business sense to make a loan to someone that either currently or at some future date will not have the ability to repay the debt. These lenders are interested in getting double digit return on their investment. They can’t get 12 % interest at the bank. They are not interested in making loans to borrowers who are not going to pay.

Private Money Lenders Want To Know The Borrower’s Exist Strategy

Having an “Exit Strategy” only makes sense for both parties. Here are 2 good examples of exit strategies:

  1. A borrower has great credit and income and her bank approved her for a loan, but the appraisal noted the property had a porch that was not up to code, it needs a whole new roof, and siding has be replaced. The cost of this work due to the size of the property is almost $35,000. The exit strategy is that once the client gets the work completed she will refinance the property with the bank that already approved her.
  2. A borrower is pulling $150,000 out of their free and clear 2-unit worth $250,000. He is buying a house for $38,000 that needs a $100,000 for renovation. The aftermarket value of the property he plans on purchasing is $250,000. He plans on listing the property and selling it. Also, in this case the borrower made his money when he bought the property. This means he bought right and has a huge profit margin. He and the lender know even if a few unforeseen problems happen with his project, the project will still make a profit.

Private Money Loans Are Short Term Loans

The 3rd Golden Rule is just as important as the first 2 in that you have to be able to make the payments. Many of these loans are short term. However, if a borrower is earning $30,000 a year, lending that borrower $200,000 at 15% interest doesn’t make sense. Even though Private and Hard Money Lenders don’t put borrowers through the same scrutiny of banks, credit unions, and more traditional lenders, they still perform due diligence and want to have some sort of reassurance the borrower has the ability to repay the terms of the loan. For this reason, most of these loan are interest only to keep the payments down. Many lenders escrow the first several payment especially if there is construction that will be in progress. Most of the time it is hard to keep renters in place when a property is in the process of renovation.

Qualify For Private Money Loan

Most of the rules are simply make common sense. These are higher rate loans with less income documentation, but they are still recorded mortgage loans. Understanding these rules will make the Private and Hard Money Lending experience a lot easier.

If you have any questions or comments, or would like a referral to a reputable Private or Hard Money Lender, please contact Vince Liguori or Gustan Cho at 262-716-8151 or email us at gcho@gustancho.com

 Related> Private Money Lending

Related> Commercial Lending

Related> Hard Money Loans

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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