Private money has always been in the marketplace but not in the volume we are now seeing. Hard money loans have been a popular way to finance real estate deals in the past but this can be expensive. A typical hard money loan might not be for more than 60% LTV. The borrower has to pay points and it will be more like a bridge loan. The lender will usually require a balloon payment in a year or less. These work for short-term financing needs but what the market needs today is long term financing. Today's private lenders do not have hard loan requirements.
There is a lot of private money on the sidelines today. People with retirement accounts and wealthy people are tired of seeing their investments disappear on Wall Street. One day the market is up 150 points and the next it's down 300 points. It gyrates with every news headline without regard to financial soundness of the individual stocks and bonds. Wall Street is a high risk, low reward investment.
Many investors have pulled their money off Wall Street and have it in bank CDs and money markets. These are highly secured investments but the interest being paid is next to nothing. Certainly less than the inflation rate. That means investors are still losing money although at a slower rate than on Wall Street.
These investors want secure investments paying a reliable return. Land contracts, mortgages, and deeds of trust meet the criteria many of these investors are looking for. An 8% return on their investment that is secured by real property. The 8% varies depending on the terms of the deal but is typical.
Of course, an interest rate of 8% is more than the 4.5% that big banks are advertising. But to get that low 4.5% loan, borrowers need pristine credit, a 20% down payment, and must meet a bunch of other tough requirements that very few people qualify for.
Private lenders on the other hand are willing to lend to a broad spectrum of borrowers in exchange for the higher interest rate. Obviously, the higher the risk of default, the higher the interest rate.
A private lender looks at a variety of criteria but the borrower's credit score and the down payment are definitely key factors. I've seen private lenders make loans as risky as a low 500 FICO score if the borrower comes up with a 20% down payment. The interest rate for a loan like this is going to be over 15%.
At the other end of the scale are 8% loans with only a 5% down payment when the borrower has a credit score above 650. More typically, in the middle, you'll find an 8% down payment with an interest rate of 10% for a borrower with a credit score around 580.
Other factors private lenders consider:
· Any necessary repairs are complete before the loan is made.
· Sales price does not exceed after repair appraisal.
· Borrower's debt to income is less than 50%.
· Non-owner occupied requires a higher FICO score.
· At lease 1 year of employment at current job.
· No IRS liens, garnishments, or unpaid property taxes - anything that would be senior to the lender's fist mortgage.
· 12 months of verified payment of existing mortgage or rent.
Certainly, you'll find variations to these criteria depending on individual lenders. However, there are many want-to-be buyers in the market that qualify for private money loans although they can't qualify for a bank loan.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.