Private Money Lending
Individuals, who have a great deal of money at their disposal, may specialize in lending it to the people who find it hard to qualify for loans provided by banks and credit unions. The inability to qualify for loans provided by the aforementioned entities can be pegged down to an impending foreclosure, the need for hard money commercial construction loans, or requiring cash to finance the purchase of a property whose value cannot be appraised accurately.
Such borrowers pose a great deal of risk to traditional lenders due to a variety of reasons. Hence, it goes without saying that lenders, who provide loans to high-risk individuals and businesses, expect adequate compensation as a reward for the risk assumed. Despite stringent conditions imposed by private lenders, borrowers, who have fallen on hard times, try to seek loans that are usually hard to come by.
The Need for Private Money Lending
Although, the government is providing a number of facilities to help people avoid impending foreclosures, the eligibility criteria for qualifying for such loans may preclude the borrowers from obtaining the same. For instance, borrowers whose loans are not owned by Freddie Mac or Fannie Mae cannot opt for a loan modification or a mortgage refinance under the Making Home Affordable Program.
Again, this program is only meant for people whose loans are insured by the FHA (Federal Housing Administration). Borrowers, who are delinquent or have delayed payments by more than 30 days in the past 12 months, will not qualify for a mortgage refinance under the Home Affordable Refinance Program (HARP), despite the loans being owned or guaranteed by Freddie Mac or Fannie Mae.
Hence, such borrowers would be forced to approach private money lenders to avert foreclosures by refinancing their mortgage. The loan to value ratio, i.e., ratio between the amount of loan and the appraised value of the property, needs to below. This is possible only if the homeowner has sufficient equity in the house. The money is lent for the purpose of refinancing a primary mortgage, and the borrower may try and purchase points in order to reduce the rate of interest on the borrowed sum.
In other words, the private money lender ensures the safety of the money that is lent, by providing a loan against a property that has a substantial market value. Borrowers, who satisfy these stringent conditions, can hope to obtain a loan and thwart foreclosure proceedings.
These lenders also provide commercial construction loans to businesses as an alternative to bank loans for making the required improvements to an existing structure or for financing the construction of a new building. Again, these are collateral-based and the reason for approaching a hard money lender may be attributed to the business being a startup and not having to support financial documents, justifying the ability of the firm to make good its commitments.
A private lender provides a loan, that is typically secured by an asset, that assures him of recovering the loan by auctioning the repossessed asset. The rate of interest is also higher than the interest charged by banks and credit unions. The high rate of interest is a compensation for the risk assumed since risk and reward should be comparable to make good business sense. He generally expects the borrower to repay the loan as a lump sum. Lump-sum repayments or balloon payments are the characteristics of this method since the lender is unwilling to extend the repayment period or provide flexible repayment terms to the borrower.