How Does a Private Lender Decide to Give Loans?

Investing Money

There are many places where you can invest your money. The most common are savings accounts, money markets and the stock market. Savings accounts are safe but pay very little in investment interest. Money markets have little risk and pay better interest than savings accounts. The stock market, meanwhile, is very risky but pays well if invested wisely. Another place people like to invest is in real estate. Real estate always does well in the long run, and sometimes very well as a short-term investment. The difference between real estate and other investments though, is real estate is tangible and will always have some value.

Why Use a Private Lender

A conventional mortgage company or bank may deny your loan application if you have too many open lines of credit, or wish to suddenly fund repairs on a house you purchased for cash. Most companies and banks will also not lend money for the property until you have owned it for at least one year. This is called seasoning. A past bankruptcy or foreclosure may get you rejected as well. These are all good reasons to seek out a private lender, and most have programs you can work with.

Why Private Lenders Want to Lend

Some private lenders like the idea of investing in real estate but don't want to be bothered with repairs, sales or tenants. But they understand real estate is one of the safer investments that pay a relatively high interest rate. So, by lending the money to you, they can collect the interest and not have to deal with the problems of ownership. Their money is secured by a mortgage and note, so in the event you don't pay the loan, they can foreclose and sell the property. The qualifying process with a private lender isn't based on your personally as much as it is on the property. The amount the private investor will lend is based on an appraisal of the property. A conventional lender has programs to lend up to 100 percent of the value. The private lender will not usually go above 75 percent and they charge a higher interest rate. They don't normally lend for the long term, either--five years is usually the maximum. By getting more money down, and charging a higher rate, they lessen the risk of loosing money on their investment. They do take into consideration credit scores and, if they are very low, they may reject the loan. But most of the time with a fair or good score they will just adjust the rate accordingly. Private lenders can also require certain repairs or upgrades to be made to the property. This is just their way of protecting their investment. Private lending is great as an investment and sometimes the only means for people to get the money they need to buy property.