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FAQs
Private Money Lending FAQs
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Private Money Lending (PML) is a type of lending where individuals or private institutions
provide loans to borrowers, often for real estate investments, outside of traditional banking
systems. These loans are typically short-term, secured by real estate, and offer flexible terms
based on the relationship between the lender and borrower.
Starting as a private money lender (PML) can feel challenging, as it requires understanding the
market, assessing deals, and building connections with borrowers and other investors.
However, the simplest way to begin is by partnering with a trusted, experienced lender who can
guide you through your first investments.
In PML, lenders provide funds directly to borrowers, often for property-related investments like
fix-and-flip projects. The borrower agrees to pay back the principal with interest within a
specified timeframe, secured by the property as collateral.
- For Lenders: Higher returns, more control over investments, and flexible terms.
- For Borrowers: Faster funding, flexible qualifications, and access to financing for unconventional properties or projects.
Interest rates in PML vary but typically range between 8% and 15% per year, depending on
factors like location, loan-to-value ratio, borrower experience, and market conditions.
Most PML loans are secured by a mortgage or deed of trust on the property, giving the lender a
lien. This lien allows the lender to foreclose if the borrower defaults, making the investment less
risky.
A lien position refers to the order in which lenders get paid back if a property is sold or
foreclosed. First-lien holders are paid first, making their position more secure, while second and
third liens carry more risk but can offer higher returns.
Equity provides insight into how much of the property value is already covered by the borrower.
Higher equity generally means lower risk, as there is more “cushion” in the property’s value if it
needs to be sold or refinanced to pay back the loan.
Private money loans can fund:
- Residential properties (single-family homes, multifamily)
- Commercial properties
- Land and development projects
- Fix-and-flip properties
PML is ideal for:
- Real estate investors seeking quick capital for property acquisition or renovations
- Borrowers with unconventional projects that traditional banks won’t fund
- Investors looking for potentially higher returns through interest on loans
- Property Market Volatility: Property values can fluctuate, potentially affecting the loan’s security.
- Borrower Default: Borrowers may fail to repay, leading to foreclosure proceedings.
- Regulatory Risks: Legal requirements vary by location, and lenders need to comply with local lending regulations.
LTV is the ratio of the loan amount to the property’s current or after-repair value (ARV). A lower
LTV (often under 70%) indicates a lower risk for the lender because there’s more equity in the
property.
Underwriting assesses the investment’s potential by reviewing factors like property value,
borrower experience, LTV, and anticipated return. This process is often faster than traditional
lending, with some lenders offering preliminary approval within days.
ARV is the estimated value of a property after renovations or repairs. It helps both lenders and
borrowers gauge the potential profit on a fix-and-flip project and is crucial in determining loan
amounts.
One major benefit of PML is the speed. Funding can occur in as little as 7 to 14 days, far faster
than traditional bank loans, which often take weeks or months.
PML terms are typically 6 to 36 months, designed for short-term projects like flips. Long-term
financing might require refinancing into a conventional loan.
Absolutely. PML is popular for fix-and-flip investors due to its quick approval, short-term
flexibility, and focus on ARV rather than credit scores.
Yes. Common fees include:
- Origination Fees: 1% – 3% of the loan amount
- Processing Fees: Administrative fees for processing the loan
- Legal Fees: Costs for preparing loan documents
- Prepayment Penalties: Some loans may have fees for early payoff, though not all do.
While credit scores are considered, PML emphasizes the property’s potential. Qualifying factors
often include:]
- Experience with similar investments
- Sufficient equity in the property
- A viable exit strategy
You can check a borrower’s track record by requesting a portfolio of past projects, references, or
documented deals. Additionally, verify their business entity through online databases, state
registries, or public records for legitimacy and active status.
If a borrower defaults, the lender may pursue foreclosure, taking possession of the property to
recoup losses. Foreclosure procedures vary by state, so legal guidance is advised.
Lending laws and property markets vary widely by state, so it’s important to understand local
regulations and market conditions. Some states may be more favorable or secure for private
lending than others.
Key information includes the property details, loan amount, intended use of funds, borrower’s
experience, repayment plan, lien position, and any collateral. Understanding these elements
can help you assess the risk and potential return on your investment.
Key due diligence steps include:
- Verifying the property’s current and ARV
- Assessing the borrower’s experience and history
- Reviewing the title for any liens or claims
- Reviewing the title for any liens or claims
- Consulting local regulations for legal compliance
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