Private real estate loans come from individuals who are not tied to banks or traditional mortgage lenders. Reasons to use a private real estate loan include speedy closing, an easy application process, and the allowance of more money. Before you begin your home buying, look at our overview of private real estate loan terms to have an idea of what you could be getting yourself into.
About Private Real Estate Loans
These types of loans are typically a six-month to a three-year agreement through hard money rehab loans or asset-based loans. If you do not qualify for a traditional loan, private lenders may be the route you want to take. It is important to note that the lender may put a lien on your property and can be foreclosed as default if you do not keep up with your monthly payments.
Requirements & Paperwork
Much like a traditional loan, private money lenders may require you to show your credit history, assets, and cash flow through bank statements, proof of income, tax returns, and profit and loss statements. Depending on how aggressive the lender is, they may require more or less of the above variables. Gather this type of paperwork before applying for the loan to make the process faster.
Can You Negotiate?
In a private real estate loan, you can negotiate on specific terms to come to an agreement. If you do not like a particular aspect of the loan, you can talk with the lender and determine how to resolve the issue. Not all negotiations will go your way, but it doesn’t hurt to try.
Fees and Rates
A percentage is most likely due upfront because of the fees that are required of the lender. Some fees you may be charged with include wire fees, self-directed IRA fees, and attorney fees. You can ask for closing costs and negotiate other terms, but in general, you may have to pay some fees and a small percentage upfront to kickstart the loan process.
Interest Rates and Payback
Just as you would pay back a traditional loan with interest, the same goes for private real estate loans. Because the loan is a shorter term, you have less time to come up with this money. If you’re flipping a property, ensure your contributions will give the house a return on investment.
Now that you have a brief overview of private real estate loan terms, you can debate whether this is the loan route you want to take. Consider every option before diving into an agreement.