I’d like to discuss some myths about private money lending. Over the years, I have heard many misconceptions about private money lending so I wanted to address the top 5.
Myth # 1 – No Private Money Lender can fund in less than 30 days.
Fact: Depending on the scenario (purchase, refinance, cash out) and the borrower’s full support and cooperation in providing the documents needed in a timely manner, private money loans can be funded in less than 30 days. Otherwise, the average time frame is around 60 days. Also keep in mind the time of year, holidays can hold up the process as well as tax season in getting back the 4509′s verification.
Myth #2 – Private Money is too expensive.
Fact: Private money is becoming less expensive and competitive these days. Rates are as low as 3.50% with 20-25 yr. amortization, 7-10 yr. balloons, no prepayment penalties. If you have good credit, a low loan to value (50% or less) and your property is cash flowing enough to pay the expenses, you can qualify for lower rates.
Myth # 3 – Most borrowers seeking Private Money Loans are desperate, and turn to them as a last resort.
Fact: Most borrowers seeking private money loans are solid, successful individuals or businesses that are in a situation, or are presented with an opportunity, that does not fit easily into the structure of institutional lending. They may be self-employed individuals, businesses without a lengthy track record, or borrowers without a flawless credit history that are having a difficult time obtaining institutional loans. A private loan lender looks primarily to the collateral as the ultimate source of repayment as well as the borrower’s capacity, as indicated by their income relative to their expenses, or willingness of the borrower to repay the loan as reflected in their credit record. Private lenders are more flexible. When they look at a loan, they determine if the loan makes sense from a security point of view whereas banks rely heavily on borrowers income, credit, tax returns, etc.
Myth #4 – Private Money Lenders are a bunch of dishonest loan sharks.
Fact: Most principals in private money lending organizations are successful businesspeople with backgrounds in law, accounting, banking, real estate development or real estate investment. They provide a needed service, especially in today’s economic environment. Most are lending their own money and/or money entrusted to them by other investors or close business associates. Private Money Lenders are in business to make secure loans and provide their investors the best possible return on investment (ROI). Referrals are the life blood of the business. While there are unscrupulous people in the private money lending business, as in any business, do your homework before choosing your private money lender and you will be able to sort the good from the bad.
Myth #5 – Private Money Lenders make risky loans.
Fact: While the collective wisdom, even among real estate and mortgage professionals, is that private money lenders make risky loans, my experience is that the opposite is true. Because such lenders are typically lending their own money, they are particularly risk averse. Unless a private money lender really understands how to value the collateral against which he is lending and understands the prevailing market, he will likely not make the loan regardless of the strength of the borrower or the loan to value. On the other hand, with understanding comes knowledge, and a private money lender may make a loan that others consider risky because he simply has better information.