I have taken a LOT of calls on private lending recently, and I figured it was time to do a new post on the topic and explain when it does and does not apply.
Transcript of Video Blog:
Hey everybody, Rowan Smith from the Mortgage Center.
I want to talk to you about private lending. There’s a lot of confusion as to where it is. People will often say to me, “I tried to get five percent down with my bank, but I couldn’t document my income . So I was wondering if you have any private lenders.” And the answer is, with five percent down, “No.”
Private lending is restricted, generally, on the strength of the property and the size of your down payment. Now, sure, credit and income play a role; they want to make sure you know how to pay your bills and they want to make sure you have income. But they may not seek to verify it in exactly the same fashion that the banks will.
Many times, they won’t look at it at all. They’ll assume that if you’re stoking down 30 percent or 40 percent of the property’s value and if you have payments of $1,500 a month, that you would be a fool to do so if you didn’t have a means of making those payments, that’s equity lending.
And equity lending is really based on the quality of security, it’s proximity to major arterial routes, to urban centers, to schools, et cetera, et cetera, et cetera, predominately focused on resale value. So, if you’re buying a unique property up in the Coot Knees, and you’re trying to get 95 percent financing. If the banks won’t do it, FC and HC won’t do it, you’re not going to get it from a private lender outside of the bank of mom and dad.
Now, in cases where private lending is required, someone with poor credit, maybe their credit is below what the bank’s threshold is. And, maybe they have a large down payment. A classic example of this is someone who’s gone through a bankruptcy, who owns a business and maybe still makes very good money but, due to one reason or another, was forced to declare bankruptcy and they’ve got 30 percent down. And they’re trying to buy a place and they’re being told everywhere, “No way, we can’t due to credit.”
That’s a perfect candidate for private lending and usually they can get some reasonable rates in those circumstances assuming the property is, again, solid and secure because that’s kind of the backbone of private lending.
Another thing, is if the property doesn’t conform to standard uses. For example, a former grow op or former meth lab, or land-only on service lots, and that kind of thing. These are places where banks don’t really like to lend, at least not at the four percent range or five percent range, but that’s still good business and those properties still have value. So, if you’re a borrower looking to get some sort of land loan or a former grow op financing so you can fix it and sell it for a large profit, those are definitely the ones that we can help you.
Lastly, people that just can’t document their income. Maybe they’ve got fantastic credit. They run a small business and they make good money each year, but due to write-offs and tax-efficient accounting, they’re not able to prove their income. And if the banks don’t believe how much income they’re earning, but they have a sizable down payment, again, we might have to go to private lenders. Not always. We often have equity programs at banks and whatnot, if they have enough of a down payment.
But sometimes, there’s that gap between what the banks will do on an equity basis and between what they will do on a stated income or full income basis. And, in that gap, is where private lenders tend to make their money.
Lastly, weird situations. So, banks will often demand independent legal advice for a spouse buying a home without the other spouse on title or maybe you’re trying to do an equity takeout for investment purposes in another property. The numbers don’t quite jive because the banks don’t give you credit for your rental income the way that they used to. These are all perfect examples of places where private lending is required.
A common one is also construction or buy, fix and flip. These are places where you can use a private lender who’s not going to ask you a billion and one questions like the banks are going to ask you. I can make the process a lot easier.
Now, in exchange for all of this freedom, in exchange for all these abilities, you’re going to pay a higher rate. So, if the banks are charging four percent, you’re probably on a first mortgage looking anywhere from 6-1/2 to 12, depending on the risk that you pose as a borrower and that the property poses as security to the lender.
Now, there’s also second mortgages, third and so on and so forth, maybe you don’t want to break your first mortgage because you’ve got a fantastic rate on it, but you need 20 grand to consolidate some credit card debt and get the creditors off your back. These are all ideal things for private lending.
If you have a situation that doesn’t fit the bank, but you’ve got some equity and, generally, you need about 20 percent equity in the property, or 20 percent down for private lending to be considered effective, then please give me a call.
For the Mortgage Center, I’m Rowan Smith.
