Why should borrowers choose private lenders over traditional banks? The short answer is that these lenders fill in the gaps where other lenders fail. Many individuals today have the ability and desire to invest in a new home, but they have an unproven track record.
Take, for example, the average millennial who is just now thinking about buying a first home at the age of 30-something, with limited credit and student loans. A typical bank may turn down these borrowers for the best possible options, but hard money lenders offer opportunities.
Versatility Is a Key Reason to Trust Hard Money Lenders
Perhaps one of the most important reasons to turn to private lenders is their unique ability to provide flexible, versatile funding for virtually any need. Whereas a traditional lender may need pages and pages of documentation and proof of a project’s viability, this is not necessarily the case with some private lenders. They have the means and the dedication to help consumers of all types to secure the type of financing they desire.
This includes construction loans to build expansive projects. It includes bridge loans that are typically hard to get otherwise but fill in the gap between projects and financing. Commercial loans are even more complex to today’s average buyer. Starting a business with a new loan for a building can seem out of reach and limiting. It’s hard to create a structure and build a business without access to necessary funding. Private mortgage lenders fill this gap, too.
Perhaps one of the most important reasons to turn to these lenders over others has to do with rehabs. Rehabs are the diamond-in-the-rough type of structure that has good bones but very little value at any given point. In some situations, they can become stunning new homes or commercial properties, but to make that possible, there’s the need to access the proper funding. Traditional banks tend to see just the “rough” and lack enough focus on the “diamond” to ensure rehabbers get the funds they need to transform these spaces.
Owner-occupied loans are another key area. Expanding a property can seem difficult in some situations. Banks typically have various federal and state regulations that must be met before they can lend. This complicates the process and slows it down. Private mortgage lenders free up that space considerably.
Private Lenders Provide Opportunities
It’s important to know that hard money lenders do not just give away findings and cash on hand. They still need documentation and proof of creditworthiness. They still need agreements on repayments and, in some cases, collateral to back up the investments they will make. This seems to be about in line with a traditional bank, but that is rarely the case. Rather, these lenders work closely with borrowers to provide them with more insight and opportunity into the options available to them. They also work to solve problems as they arise, working hand-in-hand with borrowers to help them to qualify for the funding they desire.
Whereas a traditional bank places restriction and documentation limitations on any loan, that is not the case with hard money lenders. There is an application process. There are a variety of steps that must happen before private lenders will lend. Yet, there are fewer restrictions and far more opportunities available to today’s borrower with these lenders than with traditional lending institutions. For those borrowers who may have been told “no” before, hard money lenders open the door to new potential and opportunities to create outstanding results for just about any type of project out there.
Even brokers who usually work with traditional lenders can benefit from a relationship with a good private lender. Banks and typical mortgage companies won’t touch some kinds of loans or some types of buyers. Unless the broker can find alternative financing for a tricky commercial property loan or even some home loans, they will lose the deal. Learn more about the ways that private lenders can offer more opportunities to help improve a brokerage business.
When Does a Commercial Loan Need Private Investment Money?
Some companies need to purchase property before they can generate the revenue that they need to qualify for a regular business loan. They have a chicken-or-the-egg problem. However, private investors can offer them a commercial property loan to help them solve it. This is because these private investors consider the value of the property as one of the main factors to qualify the loan.
Private lenders can usually gather the information they need to make decisions quickly. This way, the business can obtain funding, get to work, and then look into obtaining separate financing later to pay back this type of loan. Because private lenders typically offer short-term financing until companies can gain financing, these kinds of loans are often called bridge loans.
When to Seek Private Home Loans?
Homeowners might need to seek private lenders for a variety of reasons. One of the most common examples includes people who need to buy a new home before they can sell their old one. With a mortgage on the old home, these clients might not qualify for the new loan. This frequently happens when homeowners get abruptly transferred by their company or get a new job in a different city. The owners know they will need to make payments on two homes for awhile; however, they have decided it’s the best financial decision to wait until they can get offered a good price for their first house.
These homeowners have to find a home for their family to live in quickly, and they can’t afford to wait until they sell the first house. Again, private lenders will primarily consider the value of the property that they will lend money for. They may also consider the reason that the homeowners want to buy a second house before selling the first. Private lenders can also make decisions much faster than banks can, so the family can get settled in a new city quickly. Once the first home sells, the family should qualify for a traditional mortgage and be able to pay the private lender back promptly.
Private Investment Property Loans
Property investors may have to act quickly when they find a good deal on an investment property. They certainly can’t wait weeks or even months for a bank mortgage officer to make a decision. If investors want to purchase multiple properties, they may never be able to qualify for regular mortgages anyway because their debt ratios will be too high for a regular mortgage lender.
Private investors qualify borrowers differently. They can offer lending approvals and cash quickly, so the investor can take advantage of the deal before it gets snapped up by a competitor. Property investors often plan to rehabilitate and sell the home, which gives them the funds to pay the lender back and take a profit.
Why Develop a Relationship With Private Lenders?
Of course, all private real estate lending companies aren’t the same. Even though it’s realistic to expect higher interest rates from private loans, it’s only fair for brokers to find lenders who will offer their clients rates and fees that are competitive with other private lenders. Mostly, brokers know that their clients want quick loan approvals, rapid funding, and minimal paperwork.