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Private money mortgages are loans secured by real estate made by a private lender instead of a bank, lending institution or government agency. Private money mortgages loans are short-term (generally six months to two years) asset based loans made to the professional real estate investor for the purchase, rehabilitation or equity cash out of real property. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower’s credit.
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Why would I consider obtaining a Private Mortgage?
You should consider a Private Mortgage if you have problems qualifying for a traditional mortgage. It might be credit trouble from the borrowers past, excessive debt or the property is not producing a sufficient cash flow. In these cases the private mortgage lender may be the only available source for funds.
While a traditional lender may look to the property, the borrower and his/her credit, a private money mortgage lender is concerned with the appraised value. As a security, the property is producing or can produce sufficient income to pay the note and the value of the property leaving the issues of the borrower's credit or income as a less important factor in providing the loan.
Speed of closing the transaction. A conventional mortgage from a traditional source may take between 60 and 90 days to fund. Traditional lenders need to obtain a formal appraisal of the property, perform a detailed examination of the borrower’s credit history and current financial status, and review financial statements and tax returns for both the borrower and the property.
A private money mortgage lender can usually complete a transaction within seven-to-10 days. As the property itself is the main criteria in determining loan approval, there is much less examination of the borrower and the borrower's other properties. The private mortgage lender can generally make a decision within 24 hours of receiving information; whereas a traditional lender may take weeks to have a loan committee commit to the loan.
Privacy may also be a reason for considering a Private Mortgage. Some borrowers may not want or be able to provide personal financial information. They may be adverse to the hassles of the application process associated with obtaining a traditional mortgage loan. A divorce or business separation may necessitate keeping financials under wrap. Current, accurate financials may not be up to date. While all these would negate or at least delay his getting a conventional mortgage, it should have no effect on the borrower's ability to obtain a private money mortgage.
Additional leverage may also be a reason to consider Private Mortgages. The borrower may want to utilize less of his/her own capital in the property. A traditional lender will use the lesser of the purchase price of the property or appraised value; a private money mortgage lenders lend based on the appraised value only. Hence the real estate investor utilizing a private money loan is not penalized for purchasing the property at a significant discount to market value.
Private Mortgages also satisfy the need for speed when closing on a property.
Private money mortgages are available for personal, investment, and commercial purposes. By dealing with a private money mortgage lender, you are avoiding the pitfalls of dealing with a traditional bank. Private money mortgages can be obtained from private parties, hard money lenders, investment groups, private lenders or venture capitalists.
A traditional loan obtained from banking or institutional source, called conventional mortgage money, can take up to several months. These lenders need to obtain an appraisal the property, perform a detailed examination of the borrower’s credit history and current financial status. They will perform a detailed analysis of financial statements and tax returns for the property as well as other real property and business interests owned by the borrowing entity and the borrower himself.
Private Mortgage lenders on the other hand can usually complete a transaction in a few weeks, sometimes within days. The property itself is the main criteria to be used to determine loan eligibility, much less information on the borrower and the borrower's other properties are required, resulting in a much quicker approval process. The private mortgage lender can make a decision within 24 hours of receiving information; institutional mortgage money usually is approved by a loan committee, a process that substantially slows the process.
Private mortgage lenders can provide financing for real estate investment projects, land acquisitions, and construction projects. By cross- collateralizing real estate you already own, you can obtain a private mortgage for purposes that are unrelated to real estate. The use of funds is not nearly as important as much as how the loan will be paid back.
