Private money lenders, aka hard money investors, are individuals with cash, family trusts, or IRA accounts who invest in promissory notes secured by Seed of Trust. Real estate investments in secured loans yield much higher ROI than any CD, savings account, mutual funds, or bond investment. Private money lenders invest through mortgage brokers on hard money loans secured by the equity in real estate. Another general definition of a Private Money Lender is the Loan broker or a direct lender who arranges hard money loans. The source of the money is private investors, in contrast with institutional lenders or banks.
The terms Private money lenders, Hard money lenders, and Hard money brokers are often interchangeable to mean the persons or companies who arrange hard money loans. A private investor is an individual with money, often calls a private money lender. You can see how the term Private money lender can be confusing because it can mean the person with the money or the person who arranges the loan. The definition of Private Money Lenders can become even more complex, where the Lenders or the brokers are using their own personal money to funds loans to borrowers.
Borrowers who need loans care less about the source of the money. Borrowers are more concerned with the amount of cash they can get, the interest rate, payments, duration, fees, and the time it takes to get the money. If you're press to get a loan, you can skip the rest of this discussion and use Lendersa loan request to find you the most optimum loan in minutes from among thousands of loan programs. You may or may not need to resort to private money lending because institutions like bank and Non-Qm Lenders have a better rate and terms which can save you money. If time is of the essence, you have credit issues, or you cannot easily verify your income, private money lenders could be your best solution.
Federal and State laws require many real disclosures and legal documents that must be arranged only by licensed lenders. Private investors do not directly give money to borrowers but only through hard money brokers or Direct Lenders companies with funding pools. The two most common methods of investing in secured real estate loan are:
A. Direct investing in a Deed of Trust (TD short of Trust Deed)
B. Participating in an investment pool
A Deed of Trust ( TD) is a recorded document ensuring the legal right of the investors in the loan and the property. Borrowers with unpaid mortgages often say, "the bank owns my house". Similarly, the private lender could be considered kind of the "property owner." (A Deed of Trust is often called a Mortgage, and the two terms are interchangeable in speech but they are not identical. The Deed of trust is a recorded security instrument and gives the beneficiaries the right to sell the property in default to recover the investment. In addition to the TD, the investor also the beneficiary of a promissory note signed by the borrower. The promissory note contains all the details of the loan and the exact agreement about payments, late fees, prepay penalties, etc. Unlike the TD, the promissory note is not recorded and does not become a public record.
Most hard money lenders can fractionalize a single Deed of Trust and divide the investment among 2, 3, or more investors. The loan is serviced by a licensed servicer who sends statements, collects money, and distributes it to the private money lenders according to their investment proportion in the Deed of Trust. The hard money lender who originates the loan can be the servicer or a third-party licensed servicing company. Experienced investors who have lots of money could be the sole beneficiaries of the Deed of Trust.
Private Investors are restricted by State and Federal rules regarding the loan amount, Loan to Value LTV, and other loan features. Some restrictions are there to protect the investor. E.g., in some states, the Private investor is limited to invest no more than 10% of his net worth in any TD, and the maximum LTV on certain loans cannot exceed 65%. For more examples and information on restriction and risks, read the brochure published by the California Department of real estate TRUST DEED INVESTMENTS WHAT YOU SHOULD KNOW!!
The second investment method in Trust Deeds is to buy a share in a pool of loans secured by equity on several properties. It is like buying a bond secured by real estate. The money Investor does not know the details of each transaction, and he relies on the experience and reputation of the pool manager. To invest in a pool the private investor transfer money to the lender's pool account and the lender use that money to arrange loans to borrowers. When the investors invest in a single promissory note secured TD, the money goes directly from the investor to the borrower via escrow but not to lender. The yield to investors depends on the pool type, the LTV of the underlying properties.
The most significant risk is losing the property in foreclosure, but before that is the risk of not negotiating solutions in the event of default. Foreclosure is the ultimate mechanism to pay back the loan, but it is not always the best course of action. Experienced hard money lenders can figure out ways to help the borrower who run into trouble and preserve the investor principal and interest. Inexperienced hard money lenders who fund loans with inexperienced private money lenders can panic when a default occurs. Instead of solving the situation, it can drag the borrowers and the investors into an unnecessary legal battle.
Hard Money Loans can sometimes be the only possible lending solution you have. However, before you are looking for private investors, check other options on Lendersa integrated calculator. Among thousands of loan programs updated daily, you may find a less expensive solution
In addition to checking out Rate & Terms, it is vital to check the lender's reputation before signing any loan documents or even a loan application
Just like the lender qualify the borrowers, so do the borrowers need to qualify the lenders. Online reviews are often exaggerating the lender's performance and must be view with a grain of salt. Time in business is a good indicator of stability. Personal recommendation from a person you trust is good but rarely possible. Check the Company record, the executive records, and the loan officer records simply by google the names. When looking for a review online on Yelp or similar sites, look for the worse reviews and ask the loan officer to explain it to you.
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