Most private lenders lend money to real estate speculators who wish to buy a house, refurbish it, and then resell it, commonly known as “fix and flip,” however, that is not the only reason you should use a private lender for a loan to buy a house.
Why Use a Private Lender for a Loan to Buy a House?
The fact is, getting a loan to buy a house from a private lender is much easier than traditional banking institutions. Although these lenders still have some government restrictions and regulations, they are not as strict as banking institutions.
Those restrictions typically pertain to the condition of the property, how many home loans you can have and who will live in the house. However, some loan limits relate to who they will guarantee the mortgage through. For instance, the VA will only guarantee a loan to buy a house for those who have honorably served in the military. The Federal Housing Administration (FHA) typically insures a loan to buy a house for low or moderate-income families.
Some of these conditions are not appropriate for buying real estate property for profit, but private lenders or hard money lenders usually do not have these stipulations. They are most interested in a return on their investment and are willing to use the property as collateral for the loan.
When to Use Hard Money as a Loan to Buy a House or Investment Property
The question of when to use a private or hard money lender will generally depend on the conditions of the loan you are trying to get. However, when you find a perfect property to invest in either long-term or as a short-term fix and flip investment, you know you cannot wait for a bank to approve your loan.
You need a loan right away because a perfect investment property will not stay on the market for long. You might even have to participate in an auction to get the property, and the auction house wants their cash right after the sale is complete.
What Are the Pros & Cons of Using a Private Lender?
The obvious pros to using a private lender to get a loan to buy a house are the quick application process and fewer restrictions; some will even allow an online application. Whereas, traditional lenders such as banks, credit unions, and thrift savings want too much information. An application can take months. When you find a property to invest in, you do not have months to wait.
Therefore, many real estate investors will take a short-term loan to secure the property while they do whatever is necessary to get a long-term loan, even if that is a total renovation. The price of acquiring a short-term loan to buy a house may be considerably more than a regular mortgage, but that might be the price of doing business. Likewise, even though the interest rate is higher, the terms of the loan are shorter.
It also might be a deductible business expense, but because tax laws continuously change you should check with a tax law professional to determine what expenses from a short-term loan are deductible.
Why Consider Getting a Short-Term Loan to Buy a House?
There are many reasons to use a private lender for a short-term loan to buy a house. The most obvious reason is when you don’t have the cash on hand to get the desired property right away. Another might be when you underestimate the repair costs or discover a problem – such as asbestos, lead paint, galvanized pipes that inhibit water pressure, or foundation or roofing problems.
Government agencies will likely require your renovation project work to stop if lead paint or asbestos are discovered on a property you are remodeling. It can cost thousands and set your completion schedule back days or even weeks.
Investors who wish to buy a multiple-family dwelling to rent as a long-term investment might want to use a private loan to buy a house. Additionally, there may be upgrades required for the property. These can include a new roof or other major repairs that need to be completed before you can secure a long-term mortgage for the property. The VA, for example, will only allow two layers of shingles on a roof. After that, you need to tear off both existing layers before applying the new roof.
Who Are These Private Lenders?
Private lenders or hard money lenders, as they are known in the real estate investment industry, could be a friend or relative with money to lend. Usually, they are investors as well. When you have that much money to invest, why would you leave it in a bank earning pennies in interest when you could provide an investor the money for a loan to buy a house?
Private loans can range from 7-15 percent interest and, as stated above, are typically short-term – six months to a year. The investor can get their money back quickly and invest again and again. Now, if you have money to lend, you are probably thinking about how you can get in on an investment like that. The answer to borrowers and investors alike is Red Door Funding.
Red Door Funding, We Are “Opening the Door to the Funds You Need!”
In the Houston area, call the friendly professionals at Red Door Funding, (832) 539-1099. We can make the match between real estate investors and those who have money to invest. We have been providing loans to real estate investors in the Houston area for decades and know the contractors and other specialists with a reputation for repaying. That’s what it really comes down to with private money lending: the relationship between lender and borrower.
Give us a call or start an online application here. Our email is, dwilliams@reddoorfunding.com. We make money available to investment specialists in the Houston area.