Let’s break down private lending in detail.
We suppose the best way to introduce this topic is to start with the basics. What is a private money lender and why do they matter? For starters, private lenders aren’t banks. A private money lender is a non-institutional company (or individual) that loans money typically for the purpose of funding a real estate deal.
The easiest way to break down the benefits and drawbacks of private lending is to compare private lending with banks. Let’s try and simply Pro / Con list.
Private Lending Benefits
As we’ve covered before, speed is probably the largest advantage of private lending—funding can be secured extremely quickly and the qualification process is much less laborious and intricate. In most situations, these deals can be completed and funded within a week. Compare that to the 45-60 days it takes, on average, to secure a bank or credit union loan. The application process usually takes 1-2 days, and sometimes can be completed the very same day. Needless to say, speed is a huge advantage, especially if you’re trying to secure a property against other competing bids. A quick close with a private lender can entice sellers and set your offer apart from other buyers with slower, more conventional funding.
Some other benefits include:
- No rigid lending requirements. The lender and the borrower can set their own terms according to their needs.
- Much less emphasis is placed on income requirements and credit scores. More focus placed on the value of the deal rather than the history of the borrower.
- No high prepayment penalty fees
Private Lending Drawbacks
- Loans typically are accompanied by a higher interest rate compared to traditional banks.
- Most loans are short-term (banks can extend to over 20 years) and lenders expect to see a detailed exit strategy.
- You must clearly show the property’s income potential—which can be challenging on a tight budget and timeframe.
- A poor or mediocre loan-to-value ratio will put you in the position to cross-collateralize to reach your full amount requested.