Unlike hard money loans, a private money loan is another option for real estate investors when a traditional mortgage lender may not work for their situation. A private lender uses a property as an asset and collateral. There are a ton of ins and outs. Let’s break it down.
A private money loan is an asset-based loan. One of the biggest factors affecting the approval of a traditional loan is your credit history and income. Lenders want a candidate that possesses a reputable re-payment history because this demonstrates the consumer’s ability to repay loans.
However, it is no secret that a great credit score and a lot of income, isn’t necessarily a golden ticket to approval – the overall process can be invasive and take a long time. Private lenders utilize a different approach by lending funds based on collateral; therefore, the lender places less emphasis on credit history.
Private money loans are not for everyone, but there are several situations where these loans make sense. Thanks to Chip and Joanna Gaines, one of the biggest investment trends is flipping houses. If you’re just starting out, and do not have the capital to put up front, a private money loan makes sense – you’ll own the property for a short window so that you can remodel the property and sell it.
How Does a Private Money Loan Work?
Generally, private money loans are contracted for a short-term – usually between 6 to 24 months. A real estate investor would not want their loan for a long period of time because the interest rates are typically higher than traditional loans. One of the biggest benefits of choosing a private money loan is the speed at which you can close. Walnut Street Finance can close quickly in a matter of days which is essential when trying to win the bidding war on a property for your next project.
Basically, private money loans allow real estate investors and developers the opportunity to purchase more properties and do more deals with less upfront capital which results in a great return on their investment.
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How is a Private Money Loan Different from a Traditional Loan or Direct Loan?
There are a number of factors that differentiate private loans from traditional and/or direct loans. Private money loans differ from traditional bank financing because they offer greater leverage to the borrower and they are able to close and fund deals faster than a traditional bank loan.
- Speed: Most private lending companies are not as concerned with your financial position – unlike traditional and direct loan lenders which allows them to move more quickly through the loan closing process. Private lenders can close in a matter of days if the borrower is well prepared and the property doesn’t have any red flags. Speed can really be a deal breaker when multiple offers are on the table.
- Adjustable Repayment Schedules: Typically, traditional and direct lenders do not have a lot of flexibility when it comes to the underwriting process. Unlike hard money lenders, private lenders have the freedom to tweak repayment schedules and other conditions, within the contract, because they are not held to strict guidelines and regulations like traditional banks.
- Approval: Private lenders loan money based primarily on the value of the property. We do consider borrower credit history and experience, but our loan programs are flexible enough to work with all borrowers who have a decent deal and borrower profile.
What’s a Bridge Loan?
A real estate bridge loan, sometimes referred to as a “swing loan,” “gap financing,” or “interim financing,” is a short-term loan that “bridges the gap” or gets a borrower from point ‘A’ to ‘B’ by leveraging the equity in a property they already own. Bridge loans are ideal for real estate investors who have multiple projects in progress and are awaiting the sale of one project to come through so they can get started on the next project.
What’s a Construction Loan?
Private construction loans are frequently used to finance residential or commercial new construction projects. Typical construction loans run for six months to two years, requires interest-only payments – that are often bundled into the loan itself – and are funded in installments that follow a predetermined schedule of milestones.
What’s an Acquisition Loan?
A real estate acquisition loan is financing for the purchase, or acquisition, of property. The targeted property may be intended for resale by a wholesaler, for a fix and flip project, or for a condominium conversion, but as long as the loan is earmarked for the purchase only, it is considered to be an acquisition loan.
What Properties Do Private Lenders Lend On?
For the most part, a borrower can obtain a private loan on just about any property – single-family residential, multi-family residential, commercial, land, and industrial.
It is important to note that Walnut Street Finance will not extend a loan on an owner-occupied residential property and must fall into either a fix and flip or a fix and hold (typically to rent) scenario.
How Do You Get a Private Money Loan?
For starters, you need to have a property in mind for your real estate investment project. Once you have a property identified, you need to submit your information to apply. Each deal will be different, however, we generally require a personal financial statement, proof of income and property information. Then the deal will go through the underwriting process to be approved. If the deal is approved (which can be done in minutes) then we proceed to closing.
I’m now working on my second project with WSF. The loan process for both was fast and easy. My second loan closed exactly four days after I brought them the deal. Looking for another deal now!Chris J.Washington, DC
The WSF team has been fantastic and hands-on the whole way. They have been easy to work with, and have given me tips on everything from roofing to sod, then helped me find a great local realtor and stager. A great partner.John G.Vienna, VA
I have worked with Walnut Street Finance on two deals in DC. Our first property is under contract above asking price, and we're underway with the second. The Walnut Street Finance team has been very helpful and done everything possible to help me succeed.Andy S.Alexandria, VA