In days of old, if you wanted to get a loan, pretty much your only options were banks. And the bank could reject your loan application for any reason—your credit score, your loan-to-income ratio, etc. But today, small private money lenders are changing how it’s done by providing alternatives in several areas, such as commercial or residential real estate. The real estate market moves fast, and it’s crucial to act quickly. But the process of getting a traditional loan through a bank can often be lengthy and complicated. On the other hand, private personal loans could be easier and faster, leading investors to make the switch.
What is a private personal loan?
Banks’ standards are very steep when it comes to loaning money. They may require credit checks, financial statements, collateral and—if you’re trying to start a business—a business plan. According to Michael Mikhail, CEO of private money lender Stratton Equities, banks and real estate investors aren’t the best match with bank loans. So, what is a private personal loan? Simply put, it’s a loan that comes not from a bank but a private company or individual. Private money lenders use their own criteria to determine whether or not to give someone a loan.
The real estate investing dilemma
Small private money lenders like Stratton aim to accommodate real estate investors. Their programs are designed for people who make a lot of monetary transactions and often can’t show their income.
“Real estate investors, as we all know, don’t have the greatest of tax returns. They move money around, have different trusts and have different accounts. Banks absolutely frown upon that. Good luck getting a loan through a bank or mortgage company if you’re a hardcore real estate investor.”
Michael Mikhail
Enabling investors
Which policies of private money lenders make the process easier? First of all, the closing time for a loan is much faster. This element can be crucial for investors, as sometimes, the faster you close, the better chance you have at securing a transaction. Second, the LTV (loan to value) ratio is higher with private money lenders. “Conventional loan LTVs max out at 70%, but private money loans go up to 85%,” Mikhail said. Third, you’ll likely be spending less through private money lenders. “If you go to a bank, you’re going to have PMI (private mortgage insurance) with those loans, [which is] a few extra hundred dollars per month,” he added. But most private money lenders don’t ask for PMI, upfront fees, tax returns or junk fees.
Be it a hard money or a soft money loan, private money lenders might be faster, more understanding and more lenient than mortgage companies and banks. So, if you’re thinking of getting into real estate investing, you should definitely take these factors into account. It never hurts to do your research and compare numbers.
