What is a Private Money Loan?

A private money loan is an alternative to traditional lending methods that many consumers turn to for their financial needs. Let's take a look at what a private money loan is and how they can benefit you.

Basics

A private money loan is also sometimes referred to as a "hard money loan". These types of loans are done in non-traditional situations. They are funded by private investors who are looking for a larger than normal return on their investments.

People who take out hard money loans are usually willing to accept higher rates and repayment terms. Many private money brokers are in the market and want to simply match up funds with those who need them.

Uses

Any number of projects can be financed with a hard money loan. Whenever someone needs money for something, there is usually a hard money investor out there willing to front the cost. One common use of hard money is to get people out of foreclosure.

A homeowner that is facing foreclosure typically fails to meet the criteria of a traditional refinance. A hard money lender will lend them the money they need as long as they can repay the debt. They will also determine whether the house will be worth enough to pay off the debt if they default.

Another common use of this type of loan is for real estate rehab deals. A real estate investor seeks to purchase an old home and fix it up. With traditional lending methods, they may not receive the terms that they need. They only want the money for a year or less and then plan on selling the property. Therefore, a traditional mortgage is not ideal because it requires a large monthly payment. With a rehab loan, they can sometimes eliminate the monthly payment and get the money they need for the short term.

Terms

In order to loan money in such extreme cases, the investor is looking for an out-of-the-ordinary return on their investment. While you might be lucky to get 5% or 6% for a traditional loan, private money loans are often done for 15% return.

If you want to secure a private money loan, be prepared to pay a higher interest rate to get what you want. The terms of the loan can be flexible and do not always require a rigid monthly payment. They can be set up as a balloon payment or adjustable payment.

How to Apply

Finding a hard money lender might be more difficult than finding a traditional lender. These lenders are usually limited to a certain geographic areas.

To find one, call several mortgage brokers because hard money lenders advertise their services to brokers. Once you find a private lender, they will usually have a simple form that can be completed quickly. There is not as much paperwork involved as a traditional mortgage. 


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