When to Use Private Money Lenders
By : Edi Marinescu
Have you been turned down by the banks?
In the increasingly developing universe of mortgage financing, lending rules continually change for lenders, similar to how life circumstances change in an unforeseen way for borrowers. In the past few years, many lenders have tightened their underwriting protocols to the degree where borrowers realize that traditional real estate financing is no longer a viable option for their mortgage. Under these conditions, a borrower may have more luck going to private money lenders, where the lending guidelines are not as selective with income sources, credit history, and the sources of down payment.
What do Private Money Lenders do differently?
Private Money Lenders finance short-term real estate loans – or mortgages – secured by a property. The terms are generally between 6 and 24 months and can sometimes be even longer, depending on the lender. The loan payments can be either interest-only or amortizing. Private money lenders take on more risk than a traditional lending institution due to flexible qualification requirements and so, it is in the borrower’s best interest to pay the loan off as soon as possible, as the interest rates associated with this type of mortgage reflect the risk the lender is undertaking. Here, the borrower needs an exit strategy before signing up for a private real estate loan to prove that they can repay it at the end of the term (more on this further in the article).
|6% – 18%
|20% – 50%
|Principal & interest, interest-only, balloon
|Appraisal, lawyer, broker, lender, insurance (case specific)
|Income, credit, cash, property, exit strategy
When is the Best Time to Use Private Money Lenders?
Private real estate loans are not appropriate for all deals. Acquiring or refinancing a primary residence is the best route to take if you have healthy credit, income history, and no previous foreclosure or property condition obstacles. If nevertheless, banks are unable to obtain mortgage financing for you or if you need the loan in a short period of time, then private money could be the solution that corresponds to your situation. It is useful to consider a private loan as a way for you to either get back on your feet or to benefit from a larger profit by working out the details of your project.
Possible lending situations:
- Property requires repairs
- Property is being “flipped”
- Borrower has credit challenges
- Real estate buyer requires extra funds
- Bridge loan is required
There are various property types on which borrowers can obtain private lending as this type of lending is more versatile due to an absence of stringent requirements. The properties that qualify are single-family residential, multi-family residential, commercial, vacant land, agricultural land, and others depending on where the lender has the experience and risk appetite. Most private money lenders operate in a specific niche they are familiar with. This is why working with an experienced mortgage broker can save you time and energy in locating the corresponding lenders for you – keeping the terms of lending areas and conditions in mind.
How Does One Qualify with Private Money Lenders?
First of all, private money lenders can be found directly through a web search or mortgage brokers. Working with a mortgage broker who has access to multiple lending sources could obtain you a lower interest rate and better terms than you may be able to get through your own means and it could save you thousands of dollars over the lifetime of the loan.
Second of all, know that lenders are mainly interested in the amount of equity you hold in the property. Naturally, the higher the equity you hold, the better loan terms will be offered to you. Your credit and employment history are not crucial to private money lenders as long as you can prove you have the necessary means to make the payments and repay the loan by the end of the agreed timeframe. In more technical terms, this is referred to as an “exit strategy”, which we indicated is an important difference with private money lenders.
Here are some examples of exit strategies:
- Renovating or developing the property and selling it (also known as a “flipping the property”)
- Renovating or developing the property and refinancing with a better mortgage product when complete (also known as “holding the property”)
- Selling the property
- Expecting an inheritance or settlement
- Expecting credit or employment improvements or amendments to qualify for traditional financing as soon as possible
- Normalizing operations or cash flow to qualify for traditional lending
- Qualifying for construction financing
- Selling another property and using the funds to payout
Last, of all, the exit strategy fundamentally serves to convince the private money lender that you will be repaying the loan, in a detailed way. Getting yourself into a private money loan without prior preparation will not be sufficient to ensure the lender that you will pay back the loan in full and on time. The private money lender may back out of the deal if their risk is not justified. This is why having an exit strategy is key to obtaining private money.
The more specific and the more organized you are in regards to the steps in your plan to repay the private loan, the more flexible the lenders will be on the terms of the loan. Private money lenders will also require a current property appraisal – to indicate the value it would sell for today – which will indicate the maximum amount they would be willing to lend you. Each lender has their specific risk/reward preference and their flexibility on loan terms depends on the applicant and their reason for borrowing the funds.
Contact us today and we would be glad to find you options for your investment plan.
Lowest Residential Mortgage Rates in Canada*
|TD Bank Rate
|3 Year Fixed/ 25 yrs
|4 Year Fixed/25 yrs
|5 Year Fixed/ 25 yrs
|5 Year Variable/ 25 yrs
|5 Year Fixed/ 30 yrs
|5 Year Variable/30 yr
|3 Year Fixed/30yr
|**NEW RENTAL 5 Year Fixed /30yr
Updated: Feb 20 , 2024
* Current promotion rates may provide an additional 0.05% discount or may be anytime discontinued at the Lender discretion.Some condition may apply.Rates may vary between geographic regions and the posted rates on this website may not be available in your area.TD Bank rate used for comparable are the rate listed in the Broker Chanel Portal by TD Canada Bank at the date above. Please contact our MCI office for more details and current promotions.
LOWEST REGULAR RATES IN CANADA* * Current promotion rates may provide an additional 0.10% discount. Rates may vary between geographic regions and the posted rates on this website may not be available in your area. Please contact our MCI office for more details and current promotions.