Private mortgage loans are made by private lenders instead of traditional financing sources such as banks, lending institutions, or government agencies. They usually are short-term (6 months to 3 years) asset-based loans, and decision to lend is mainly based on equity, and value of collateralized rather than borrower’s credit.
These loans are a source of funding for professional real estate investors who wish to acquire, rehabilitate, or cash out equity of income producing property, and those who otherwise would not qualify for conventional financing. Private mortgages also assist real estate investors who need immediate financing without the financial documentation required by traditional institutional financiers.
Why Borrow Private Money?
Speed of Closing. Conventional mortgages usually take between 45 days and 90 days to fund, since institutional lenders need to obtain an appraisal of the property’s value, perform a detailed examination of the borrower’s credit history, and thoroughly evaluate the borrower’s current financial status. On the other hand, private mortgage lenders usually can complete a transaction within seven to 10 days. Since the property itself is the main criteria used to determine loan eligibility, less information on the borrower is required, resulting in a much quicker approval process.
Easy Application Process. While a borrower’s lack of up-to- date personal financial information would negate or at least delay approval for an institutional mortgage, it should have no effect on the ability to obtain a private mortgage loan. Private mortgage lenders generally base their decisions on the asset used for collateral. If the property value is high enough and income being generated from it is sufficient to pay interest on debt, then borrower’s personal financial will have less effect on lender’s decision.
Other Money Resources Are Not Available. A borrower may not qualify for an institutional mortgage loan for reasons ranging from low borrower credit scores or too much borrower debt. Further property itself may not support type of loan borrower wants: Many institutional lenders will not loan amounts under $500,000.
More Funds Available. Since private mortgage lenders base loans on appraised value of the property, borrower may be able to borrow more and therefore have less of their own capital invested in the property.
The most important parameter private mortgage lenders consider when evaluating a loan request is LTV ratio. They typically will lend up to 50 percent on raw land or undeveloped property; 65 percent on commercial income property such as office buildings, shopping centers, and warehouses; and 70 percent on multifamily income property such as apartment complexes.
Second – Type of properties to lend on, which often is determined by ease in disposing of property in case of default. A single-use property that would take longer to sell is less desirable than a multi-tenant, income producing building.
Third – Cash flow or income potential of the property put up as collateral. Although many private mortgage lenders are liberal in this area, the monthly interest payments must come from somewhere. If property is producing cash flow after all expenses the property income may cover monthly payments without borrower having to come out of pocket. This adds a great degree of safety to the note.
Fourth – Lender must consider exit strategy, or how borrower plans to repay loan. Since most private mortgage loans are short-term, private lenders have a keen interest in analyzing whether a particular exit strategy is viable. For example, if exit strategy is to refinance the property, lender must determine if credit score of borrower is high enough to qualify for a long-term mortgage, if property cash flow is sufficient to cover debt payments, and if property will meet general criteria of mortgage lenders most likely to refinance the property.
CGF, Inc. PRIVATE FUNDING ADVANTAGES
SPEED FROM APPLICATION TO CLOSING
Borrower can receive a decision 1 to 3 days.
Provide funding -10 to 14 days.
FLEXIBILITY AND SIMPLE INTEREST
Real Estate is basis of our flexible lending decisions. Borrowers pay interest monthly to benefit cash flow.
CGF, Inc. SERVICING
All loans fully serviced by CGF.
Real Estate- Tax Corner – A taxpayer can’t deduct mortgage interest pad on a Calif. home. It was not taxpayer’s main home or second residence. Taxpayer owned an interest in home but had not lived there in years. Instead taxpayer lived and worked in Minn., while the Calif. property was rented out. Tax law lets itemizers take a write-off on mortgage interest paid on a primary or secondary residence. To qualify taxpayer must use the property as a residence for greater of 14 days per year or 10% of days property is rented out at fair rental value. Taxpayer did not satisfy either requirements. (McCarthyTC Memo2020-74).