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Hard Money Loan FAQs
Private money is often misunderstood. Many industry professionals
know very little about it, and fallacies and misconceptions tend to
dominate the collective wisdom.
What is private money used for?
Private money is generally used as a bridge: a way to get from
point A to point B. It is generally a short to medium term solution
(1-6 years), and there is nearly always an exit strategy going in.
It is used for all types of real estate secured financing:
commercial retail, restaurants, hotels/motels, marinas, elder care
facilities, industrial, agricultural, raw land, land development,
construction, rehab, multi-family, single family homes, manufactured
homes, and floating homes. For a list of our loan programs, click
here.
What are the interest rates?
Private money rates generally range from 12 to 18%. The rate is
determined by looking at a combination of factors: (a) LTV ratio,
(b) strength of borrower, (c) condition/desirability of property,
(d) actual cash-in or real equity contributed by borrower. Typically
our rates fall in the 13-18% range. A list of our loan guidelines
may be found here.
What fees are involved?
We charge a loan fee (loan origination/ lender fee) generally equal to
6-8% of the gross amount of
the loan. There are no
hidden junk fees.
Can the fees be paid from the proceeds of the loan?
Yes, if there is enough equity in the project. This is frequently
the case.
Is there a pre-payment penalty?
We generally have a 3-6 month minimum interest clause for our
loans. With a 3 month minimum interest clause, for instance, it
means that if a borrower repays a loan in 3 months or more, there is
no penalty. If the borrower repays the loan, for example in 2
months, then the borrower will have to pay an extra month's interest
out of escrow at closing.
Why would anyone pay those kinds of rates and fees for a loan?
There are many reasons whey a borrower would choose to use
private money over a cheaper institutional option. For example,
professional real estate investors like to use private money when
buying because they are able to make offers which are not
constrained by long timelines and numerous rigid conditions. Often
times speed is a very significant factor in completing a profitable
transaction and in those cases it often makes sense to pay for a
short-term private money option rather than loose the deal.
Frequently the condition of a property won't allow for the initial
financing with conventional money, and in those cases private money
may be used. Often the type of property is a factor: banks don't
like lending on raw land and lots, but private money lenders are
more inclined to do so. Cash leverage is another factor. Private
Funding of Nevada, for example, loans based on the true value of a property,
not the purchase price, so sometimes we lend 100% of the total
acquisition cost for a property. The structure of the deal may be a
factor. Most private money lenders allow the buyer to establish
their equity through the mechanism of a seller carry back; banks
won't do this. The list goes on and on.
What is the most common use for private money?
Our most common loans are probably construction, rehab, and land
development loans. We have an entire FAQ devoted to these loans: see
the Rehab and Construction Loan FAQ.
How fast can private money loans close?
We have been known to close loans in a matter of one or two days,
but more typically, you should figure on 1-2 weeks. (Keep in mind
that it is only possible for us to move quickly if the borrower,
broker and other third parties are moving quickly as well.)
Is an appraisal required?
Some private money lenders require them. We don't. Evidence of
value is a critical part of the private money loan process. However,
it is our opinion that a good set of comps is just as effective in
establishing value as a good appraisal. Many of our borrowers are
professional investors, and we feel that they are qualified to
perform the value analysis. This allows us to streamline the
process. However, it is important to note that putting together a
god set of comps is hard work. See this article on our website for a
detailed description of how to prepare a proper value analysis.
As a mainstream mortgage broker, I don't see much of this type
of thing. Why should I be interested in private money?
To be perfectly frank, it is my belief that mainstream mortgage
brokers are being squeezed out of the industry. Lenders are ramping
up their operations to better provide online loan sourcing directly
to borrowers. We saw a similar thing in the travel industry over the
past years. The travel agents that have survived, and even thrived,
are the ones who effectively established niches within the industry.
It is my belief that the same will be true for mortgage brokers.
Plain vanilla loans can be easily processed in an assembly line
fashion which easily translates to the world of the novice and a web
browser. Niche lending, on the other hand, tends to be a
hand-crafting of sorts, and cannot be easily automated. Look at
private money. There are no absolute rules. Many factors must be
considered in making a decision and frequently those factors are
intangible. Ultimately a high degree of thought work and common
sense is involved. Private money will always be a people process. So
if you tell me, "I am not interested in private money because I
don't do unusual loans," I say to you, "You might want to
reconsider."
As a mortgage broker bringing you this transaction, how do I get
paid?
It is simple. You bring us a borrower. We price the loan to you.
(Think of yourself as a wholesale buyer.) You price the loan to your
client, adding your fees as appropriate. You stay involved in the
loan (or not) as you choose, and prior to closing, you submit a fee
demand to escrow and receive a check directly from the title
company. For more information on this topic, Click Here.
Why do they call it "hard money"?
It is difficult to find an answer to this question. I've heard
plenty of speculation. Some people say that it's because the money
is used for "hard to do" loans. Others say it is because the loans
are "hard to get" or "hard to pay." It is my belief that it is
called hard money because traditionally it has been "real money" in
the sense that it is not borrowed. Institutions loan borrowed money,
and in this sense they loan "soft money." However, I must point out
that things have changed a bit over the years, and these days a good
deal of hard money is in fact borrowed. (I would guess as much as
50%.)
How do I go about doing a private money loan with Private
Funding in Nevada?
There are basically four steps.
- First, run the concept by us. You may call
and discuss the loan with us, or you may
e-mail a summary, or
you may use our online loan submission engine, which will walk
you through the process. If we like the project concept and feel
that the numbers are acceptable, we proceed to the next step.
- Complete a loan application. A credit check will NOT be ran.
- Complete a proposal, business plan, or project summary and e-mail or fax to us.
- If the property checks out, we draw up the
documents and close the loan through escrow.
Other information that is needed, but not required, is a copy of the purchase agreement and appraisal.
Is the deposit check refundable?
If we close the loan through escrow, the deposit is applied as a
credit to the loan fees. If we don't close the loan because (a) the
borrower does not or cannot perform or (b) the project upon
inspection is "significantly" different than as represented, we keep
the deposit to reimburse us for our costs. Otherwise, if
What needs to be included in a private money loan package?
A private money loan packet is generally fairly straightforward.
For a list of our packaging guidelines, please Click Here
Related resources
Private Funding of
- Hard Money Loans
- Private Money Loans
- Commercial Loans
- Bad Credit Loans
- Land Loans
- Investor Rehab Loans
- Residential Loans
- Home Loans
- Refinance Loans
- Home Equity Loans