Private Money Loan vs. Traditional LoanMar 21, 2023
When it comes to financing a real estate purchase, there are two main types of lenders: traditional lending institutions and private money lenders. Both types of lenders offer unique advantages and disadvantages, and it's important to understand the differences between them before making a decision. In this blog post, we'll take a closer look at traditional lending versus private money lending for a real estate loan and explore the key factors that borrowers should consider.
Speed of Loan Process:
One of the biggest advantages of private money lending is the speed of the loan process. Private lenders can typically fund loans much faster than traditional lenders, often within a matter of days or weeks. This can be a major advantage for real estate investors who need to move quickly to secure a property before it's snapped up by someone else. Traditional lenders, on the other hand, may take several weeks or even months to approve and fund a loan.
Borrow Credit History versus Property Loan-to-Value Ratio:
Traditional lenders tend to place a greater emphasis on a borrower's credit history and financial standing when deciding whether to approve a loan. Private money lenders, on the other hand, are often more concerned with the loan-to-value ratio of the property being purchased. This means that borrowers with less-than-perfect credit may have an easier time securing financing through a private lender, as long as the property's value supports the loan amount.
Loan Rates and Loan Fees:
Another key difference between traditional and private lending is the cost of borrowing. Traditional lenders typically offer lower interest rates and fees, but may require borrowers to have higher credit scores and larger down payments. Private lenders, on the other hand, may charge higher interest rates and fees, but may be more flexible when it comes to credit and down payment requirements.
Private money lenders may also offer interest-only payment options, which can be attractive to real estate investors who are looking to maximize their cash flow. With an interest-only loan, borrowers only pay the interest on the loan for a certain period of time, typically 1-5 years, before the principal balance becomes due. This can help borrowers keep their monthly payments low during the initial period of ownership.
Choosing between traditional lending and private money lending for a real estate loan depends on several factors, including the speed of the loan process, the borrower's credit history, the loan-to-value ratio of the property, and the interest rates and fees associated with each option. Ultimately, borrowers should weigh the pros and cons of each option carefully before deciding. If speed and flexibility are a top priority, private money lending may be the best option. However, if borrowers are willing to go through a longer application process in exchange for lower rates and fees, traditional lending may be the better choice.