Do you know private money loans or direct lending have shown an average return of 11.6% in the third quarter of 2023 as compared to leveraged loans with 5% and high-yield bonds with 6.8%. This indicates private money loans are emerging as an appeal option for investors as per recent financial trends.
Private money loans are financing options that are offered by individuals or private lenders for a short duration for real estate investment, business funding, etc. and are secured by assets. This blog will focus on understanding various key benefits of private money loans for real estate so you can leverage the insights and improve your financial planning for your next investment.
Flexibility in Loan Terms and Conditions
Private money loans are preferred by real estate investors due to their primary reason of flexibility in loan terms and conditions that enhance tailored financing solutions from project-specific financing to negotiable terms.
Listed below are a few services that cater to flexible loan terms and conditions given by a private money lender:
- Private lenders are flexible in negotiating repayment schedules so they can align with borrowers’ project timelines. The schedule can include adjusting the interest-only period or extending the repayment time.
- As per the borrower profile and risk percentage of the project, the private money lenders may also adjust the interest rate.
- Private mortgage lenders also help borrowers in quicker decisions through quicker adjustments by being responsive to market conditions and borrowers’ requirements. If the real estate market is volatile, then the lender can offer higher flexible terms so property fluctuating values can be accommodated.
Easier Qualification Process and Fast Funding
Private money loans have less stringent requirements that enable them as a streamlined capital access option. Listed below are a few insights regarding how private money loans give quick approval:
- Compared to traditional loans, private money loans give strong emphasis on borrowers’ property value/valuable assets rather than credit score, which helps borrowers with low credit history to qualify for the loan. There is no minimum credit score requirement, but it is beneficial to have a score of at least 500 for flexible terms and interest rates.
- The private money lender requirements are not that complicated due to the simplified documentation process that focuses on knowing the value of the asset and investors’ plans of utilizing the funds rather than getting extensive information about tax returns, personal credit history, proof of income, and more.
- The disbursement process is fast compared to traditional loans and is bifurcated in various timelines as given below in the table.
| Phase | Private Money Loan | Traditional Loan |
| Pre-Approval | Approx. 1-3 days | Approx. 1-2 weeks |
| Underwriting | Approx. 2-5 days | Approx.1-4 weeks |
| Final Approval | Approx. 1-2 days | Approx. 1-2 weeks |
| Disbursement of Funds | Approx. 5-10 days | Approx. 2-8 weeks. |
“Step-by-step approval process for private money loans for real estate”
No Extended Limitations on Type of Property to be Financed
A private money lender has no set type of property that can be financed through the loan, which gives borrowers the advantage of diversifying their investments and getting higher returns. Listed below are various properties that can be financed through a loan from private money lenders:
- Loans from private money lenders can be used to finance properties like residential, commercial, mixed-use properties, non-conforming properties, business properties, and specialty properties.
- Private money lenders focus more on the after-repair value of the property than the current condition of the property if used for renovation or flip-flop projects.
Collateral Flexibility and Cross-Collateralization
Private money loans offer collateral flexibility and cross-collateralization, which is helpful for both the lender and the buyer. Lenders get more security that helps them in risk mitigation, whereas, borrowers get varied asset options to finance and get a higher amount of loan.
Listed below are key benefits derived from this feature:
- Private lenders for real estate accept a variety of assets for financing, such as personal assets, commercial assets, business assets, etc, which gives more flexibility.
In the table below are the types of assets under each category that borrowers can use:
| Category | Assets Accepted |
| Real Estate | Residential Properties, Commercial Properties, Land |
| Personal Assets | Financial Accounts, Vehicles as Mortgage |
| Business Assets | Inventory, Accounts Receivable, Equipment |
Note: This is the general overview of assets accepted, the list may vary from lender to lender and their requirements.
- Cross collateralization helps borrowers use different assets or properties to secure a single loan, and it also helps lenders get assurance for repayment from different sources. It acts as a tool for enhancing financial leverage and improving future financing.
Conclusion
If as a real estate investor, you don’t fit into traditional loan models, then private money loans can be a major game changer for real estate investors in the competitive landscape due to their features like quicker funding, flexible terms, etc., offering investors the ability to drive higher returns. The other aspect for investors for strategic financial planning involves getting the right private money lending solutions partner like Munshibiz for tailored services and an easier qualification process.
Read More: Get the Cash You Need Now | Hard Money Loans by Munshi.Biz
Frequently asked questions
1. What is the down payment percentage by private mortgage lenders for private real estate loans?
The down payment percentage by private mortgage lenders is between 20% to 30% of the property purchase value. It may vary from lender to lender.
2. In private money lending, do lenders offer loans to buyers with low credit scores?
Yes, private money loan lenders offer loans to buyers with a low credit score, as the focus is more on the property value as compared to conventional loans, where the focus is on the buyer’s credit score.
3. What are the risks involved with private financing for real estate loans?
Risks such as higher interest rates, shorter repayment terms, foreclosure risk, less regulation, etc., are involved with private financing for real estate loans.
4. Can first-time real estate investors go for private money loans?
Yes, first-time real estate investors can go for private money lending, especially if the buyer is looking for fast funding and flexible term options.
