Private Money loans are needed when a borrower or a property falls outside the standard underwriting rules of conventional lending sources like traditional banks or other lending institutions. Private Money financing refers to loans collateralized by real estate, where the source of the funds used to close Real Estate transactions come from non agency investors. This is different than the typical mortgage situation where a loan would be sold to institutional agencies such as Fannie Mae, Freddie Mac, or Ginnie Mae.
When it comes to Non-traditional (“Non Conventional”) financing, the decision to approve a loan is based primarily upon the equity in the real property securing the loan, and other characteristics of the application that adds additional risk of loss. The borrower's character is also considered along with how the borrower will pay the investor back in time. Part of that is determined by a credit report profile as well as cash-flow management and history.
The Primary Decision For Private Money Is Typically Based On The Simple Three–Four C's Of Private Money Lending:
- Capacity to repay the loan back
- Credit/Character of the borrower
- Collateral or property type
With risk of loss lessened, a loan may be a sensible deal from the Private Money Lender's point of view, but it remains discarded to institutional lenders. To meet the continuing financing needs of these borrowers, an ongoing demand for private money has been created.
The Reason Why People Need Private Money:
1. Loss of bank loans, including denial due to:
- Use of cash out
- Not perfect credit
- Needing stabilized income
- No reserves
- Not operating with a bank account
- Debt ratios to high
- Property type or condition
- Borrower type (i.e. trusts)
2. Borrower's election to avoid the excessive loan conditions of an institutional loan saving time
3. Private Money Lenders ability to arrange loans secured by property types unacceptable to Institutional lenders
4. Borrower's circumstances make it difficult to obtain institutional loans
5. Property's characteristics make it difficult to obtain an institutional loan
As a private direct lender, Approved Funding has a wide ranging variety of loan programs available to suit almost any sensible loan scenario. If any of these scenarios sound familiar to you or you need more information about non-traditional loans check out our Specialty Lending programs.