A private money loan is a short-term loan secured by real property, usually for a new purchase. While all real estate loans are secured by the property, private money lenders focus their underwriting on the property versus the borrower, which is where traditional lenders like banks usually focus their underwriting. The private money lender makes loans against property with the knowledge they can take the property to foreclosure, and possibly obtain ownership, if the borrower doesn’t stay current on their payments.
Borrowers are surprised to hear that private money loans have different qualifications than traditional loans. For instance, because private money loans are asset-based, loan approval is usually not contingent on the borrower’s credit score. Here are things private money lenders check when making lending decisions.
Equity
One of the first things that private money lenders check when deciding whether to lend to an applicant is their equity in the property, that is, the portion of the property they own outright.
An applicant’s equity in their property is calculated by subtracting the amount they owe on their mortgage from the appraised value.
Altus Capital Group specializes in being able to creatively structure loans to maximize leverage applied to the subject property.
Real Estate Investing Experience
Many private money lenders will want to check whether applicants have prior experience investing in real estate and are equipped to manage investment risks.
If, for example, you want to fix and flip a property, private money lenders will want to check if you have experience restoring homes and then reselling them. Lack of experience DOES NOT preclude a borrower from obtaining hard money, but the stronger a borrower’s experience the better the terms they will be able to obtain.
The Applicant’s Exit Strategy
When deciding whether to lend on a particular property, the private money lender will evaluate the borrower’s exit strategy: how does the borrower plan to repay the loan? They will seek answers to questions such as what happens if the property’s value goes down, the business plan takes longer to execute than assumed, or unexpected issues arise. Is the borrower equipped to get past challenging situations such as the property needing more work than expected.
Loan-to-Value Ratio
An applicant’s loan-to-value ratio, or LTV, can be calculated by dividing the loan amount by the property’s value. Often when first lending on a property the lender will calculate the loan-to-cost ratio, which is the same calculation as the LTV but against the purchase of the property.
If the value of the property in question is $2,000,000 and the borrower wants to borrow $1,000,000, the LTV is 2,000,000/1,000,000, or 50%. Because the main determinant in a private money lender making a loan is the collateral of the loan, lenders calculate an applicant’s LTV ratio to determine the risk they will be taking by lending to them.
The LTV or LTC available to borrowers varies by lender and by property type. For experienced borrowers lenders may offer as much as 75 percent of the property’s value while most lenders will not lend more than 50% on the purchase of bare land.
The Applicant’s Income
Though a private money loan is based on the property’s value, a private money lender may want to ensure that the borrower has a stable job and earns enough to manage their loan EMIs.
Altus Capital Group is one of Northern California’s most trusted real estate lending companies. A low credit score should not affect one’s chances of qualifying for a loan. We will happily make you a loan if you meet our eligibility requirements, regardless of whether traditional lenders rejected your application. Have questions about private money lending in Northern California? Call (707) 932-5887.
