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.
When looking for an alternative to the arduous loan application process through a bank, many borrowers turn to a private lending company. Private lenders have a straightforward underwriting process and good private lenders take considerably less time to process loan applications than banks.
Banks have stringent requirements and follow a complex approval process. Applicants must complete a ton of paperwork, taking anywhere from several weeks to a few months before being approved for a loan, if they are approved at all. The process can become even more strenuous if the applicant has a complicated credit history, complicated tax returns, or past unpaid debt.
As a leading private lending company in Northern California, Altus Capital Group provides lenders with dependable service, creative loan structuring, and fast closing. Here are more reasons to choose a private lender for your next property loan.
Flexibility
Private lenders offer more flexibility than traditional banks. Loans provided by banks typically have inflexible terms that are unnegotiable. On the other hand, private lenders are often willing to adjust certain terms of a loan to better suit the borrower’s unique needs.
Fund Projects That Banks Would Reject
Banks and other traditional financial institutions are often unwilling to fund loans for certain types of project, such as fix and flip projects, as they see projects without sufficient cash flow as a riskier proposition.
Private lenders lay more emphasis on collateral value rather than the borrower’s financial health, and offer fix and flip and other non-traditional loans to meet the short-term liquidity needs of real estate investors.
Private lenders adopt a more personalized and flexible approach to lending. For example, a private lender may overlook past credit issues and consider more current factors, such as the borrower’s debt-to-income ratio, when evaluating their loan eligibility. Additionally, by creatively including a borrower’s additional assets into an underwriting process, private lenders are often able to provide higher level of proceeds than what might be available through a bank lender.
Shorter Approval Process
Banks must comply with stringent norms defined government agencies and internal processes. When applying for a bank loan, applicants must complete and provide a significant amount of paperwork for use in the underwriting process. This makes the application process long and the requirements often difficult to meet.
Private loans, on the other hand, take shorter time to process. Often, it may take as little as a couple of weeks to go from initial application through the entire process to a funded loan..
Altus Capital Group offers a range of real estate financing options. Our ability to understand specific customer needs and customize lending solutions to meet them sets us apart from other private lending companies or commercial brokers in Northern California. Fill out the inquiry form to schedule your consultation, or call 707-932-5887.
