Private Money , Hard Money
By Dan Harkey
Introduction :
“ Private money , hard money , and bridge loans ” are used interchangeably .
These loans refer to alternative lending sources separate and distinct from banks and institutional lending . One or more private investors / lenders fund each loan . Pools of investment capital accumulated with many private parties are also frequently used to finance private money loans . A sponsor / manager will be formed for pooled entities to fund many loans and manage the servicing .
Private money lending stands out when traditional banks decline , or the loan transaction is nonbankable . It ' s a solution for propertyrelated issues that need to be resolved , such as completing a partially constructed building or increasing occupancy in an income property with excess vacancy .
• Marginal to poor creditworthiness , where a borrower is not bankable , and approval of a loan request is primarily property equitydriven .
• Special purposeunique properties : Churches , synagogues , restaurants , bars , automotive repair shops , body repair shops , gas stations , and other singlepurpose or limited properties .
• Limited document loans where the requirement is a loan application , credit report , and three to six months of bank statements . The objective is to prove the ability to pay the
outstanding loan payments and other debt obligations .
• Fresh start loan . Borrowers may need to catch up and give themselves breathing room for accrued and differing payments .
• Payoff loans coming due or past due : Refinance and pay off existing first , second , and third lien position loans that may be due . Sometimes , refinancing the second and providing cash out is the appropriate answer to the loan request . Loans are available for both owner and nonowneroccupied residential and commercial properties .
Transactions where private money loans benefit borrowers .
• Fast loan approval with possible 2to4day funding for bank declines and fallouts : The bank may already have done significant underwriting , including opening escrow and title , obtaining an independent appraisal , and completing the application and financials . Some private lenders can use the banks ’ information to fund faster , particularly when they have a mortgage pool or immediate capital available to invest .
• Debt consolidations for consumers , businesses , or a combination of both : In most cases , a funded loan is used for debt consolidation , lowering the borrower ’ s monthly payment obligations . The funded loan should give the borrower some breathing room to improve their credit and obtain a longterm bank loan . Also , if the loan is a second lien , the average interest rate between the first and second is calculated to show a “ neteffective rate .”
• Cashout for any reason refinances based upon the protective equity of existing real estate . Proceeds may be for business and consumer purposes . The Federal Government and some states , such as California , require a special license to engage in consumerpurpose lending .
• Junior lien or secondposition loans on both owner and nonowneroccupied dwellings for business purposes .
• Construction completion , rebuilding , or upgrading properties in poor or marginal condition : The loan is usually necessary because the collateral property or the borrower needs to meet bank underwriting guidelines in its distressed or partially completed state . Loan approval by the lender will consider the asisvalue and the ascompletedvalue .
• A borrower may own and operate a cashbased small business with limited financial strength , as the books show . A lender will require three to six months of personal and business bank statements . The borrower must still prove that they can make the required payments .
33