In this short video you will get an overview of exactly what is private lending, the critical documents required to secure the lender and the typical terms of the loan.
What is a real estate private loan?
- It is simply loan from an investor to an individual or entity which is secured on real estate.
- The real estate is the collateral for the loan.
- The loan is secure by a mortgage or deed of trust depending on the state the property is located in.
- Typically the loan is used to purchase the property and/or rehab the property.
What documents are required for private lending?
- Note – Promissory note spelling out the terms of the loan such as interest rate, length of loan, amount borrowed, etc.
- Mortgage/Deed Of Trust – Security instrument which allows the lender to foreclose and get the property back if borrower does not pay as agreed.
- Title Insurance – Protects the lender from financial loss sustained from defects in a title to a property.
- Hazard Insurance – need to name the lender as mortgagee of loss payee on the hazard insurance policy in case of loss.
Other private lending requirements:
- Personal guarantee is required by some private lenders as well.
- Appraisal is typically required for loans.
- Demonstrate and show other successful projects.
- Purchase asset in a entity and not personally.
- Minimum FICO score (usually >600).
Typically private lenders will require the following:
- LTV (Loan-To-Value) to be at or below 70%. This is to reduce the risk in case of a downturn in property values and to insure equity.
- For Fix and Flip many lenders will also require that the loan to cost be 90% or less.
- Some require points or origination fees which ranges dramatically from 0-5 points. (1 point is 1% of the loan).
- Interest rates: 8-16%.