Private money is a commonly used term in banking and finance. For the sake of this article, it refers to a loan made to a homebuyer by a private individual. While banks and mortgage companies are traditional sources of financing for real estate purchases, private money is offered by individual investors and generally offer some elements of non-traditional qualifying guidelines.
Private money lenders exist throughout the United States, seeking a chance to earn above average rates of return on their money. Private money is offered to homebuyers for cases in which the banks have found the risk to be too high or the credit too poor. This increased risk generally means a higher rate of interest and usually increased loan fees. Rates and fees on private money loans, though, differ from true “hard money” loans. In Las Vegas, you will find “private money loans” with rates in the high single-digit range and fees from 3-4 points, with no prepayment penalties. You will normally find private money loans being used for Owner-Occupied home purchases with required down payments of 25% minimum. While “hard money loans” will typically be used for investor purchases, and will bear double-digit interest rates, points ranging from 5-10, and loan maturity dates of 1-2 years. Private money lenders must comply with State and Federal usury laws. They also must adhere to strict compliance from regulations put in place in the Dodd-Frank Act. Private money lenders must qualify their buyer’s “Ability to Repay” and cannot make loans to Owner-Occupants who can’t document their financial ability to repay the debt.
So if private money lenders have to adhere to qualifying rules, when would a Realtor find it advantageous to refer their buyer to a private money lender? There are actually quite a few different scenarios commonly seen in town! First and foremost are your “2nd chance buyers” who experienced a foreclosure or short sale—and not enough time has elapsed for them to obtain a traditional loan. But also, we are now seeing many ‘potential’ buyers who have a “little something” in their profile which prevents them from obtaining traditional financing. That “little something” may be an irregular income stream, or unsourced funds for down payment, or a significant credit blemish. With traditional financing being SOOO difficult to qualify for, many homebuyers are making the decision to buy now, fix their qualifying issue, and then refinance as quickly as possible. They are making a conscious decision to become homeowners rather than renters and are willing to pay a higher rate of interest for a few years but are locking up home values at today’s prices!
Private money financing isn’t for everyone, but it absolutely serves a purpose for those buyers who have the income, the down payment and don’t want to be renters. No one knows where home prices will go in the future. But if you take the ‘glass half full’ attitude and you look around this town and see its vibrant growth, it’s “possible” that buying today with a private money loan and refinancing in 3-4 years may be a very good financial decision!
Realtors who embrace this concept will have a competitive edge in the coming years.