Private money loans to purchase a mortgage usually come from an individual or group of individuals who use their money for real estate investment purposes, short term, so that you can take advantage of a market situation, without having to wait until your credit improves, foreclosure or bankruptcy seasons, etc.
This type of loan is exclusively based off the purchase price of the property, not the appraised value.
Usually, because it is an individual’s money, they are very conservative with the amount they will lend, in relation to what the property is worth. LTVs as high as 65% is what we can do, in great situations.
The below is an example of a Hard Money Loan
Purchase Price $400,000
Property Appraises for $700,000
Private Money Investor will lend 65% of the purchase price, or $260,000
Terms will be Interest only at 9% for 5 years
Points Charged will be 4
Closing Costs – $4000
Total Cost to Buyer $140,000 down payment, plus $10,400 in points, and $4000 in closing costs.
TOTAL – $154,400
Why would anyone do that loan?
From the buyers perspective, who has a recent foreclosure less than 1 year ago, here are his motivations.
- He is buying into an equity position of $300,000
- He does not have to wait almost 3 years for his foreclosure to season to get traditional financing.
- He gets an interest only payment for 5 years. As his income stays consistent, and his foreclosure seasons in 3 years, he can refinancing into a conventional loan.
From the Private Money Investors perspective, here is his/her/their motivations.
- They are making money right away – 4 points – $10,400
- They get interest payment every month of $1950 @ 9%
- If the borrower stops making payments and defaults on the agreed upon loan terms, the private money investor gets the property, at a deep discount, and will flip the property for the equity.
- They can usually charge a 1-year pre-payment penalty for 1-3% of the outstanding loan amount owed.
While the above example is a little excessive and worst case, it is simply there to discuss the motivations of each part involved. For a detailed analysis of your next purchase loan, and to see if a private money loan is right for you, fill out some basic information below, and we will be with you shortly.
Contact Brian Quigley Today!
Hello, my name is Brian Quigley and I have been in the Denver mortgage industry since 2003. I have been fortunate enough to choose this very rewarding mortgage broker career and help thousands of borrowers over the years. Customer satisfaction is important to me most, and getting my clients to the closing table smoothly. Read More…