With the tightening up of lending in recent years, it’s tough for some real estate investors to obtain bank loans for investment properties. But, private money loans are within reach for those real estate investors who are seeking financing for their investment properties. Here are 5 commons sense tips when seeking private financing for your investment property purchases:
1. Research Hard Money or Private Money Lenders
Find a hard money / private money lender or a dedicated hard money broker who knows all the real lenders from the bogus lenders. Do you homework on a lender to find out what their criteria for lending are, what types of properties they like, and their loan terms. Make sure the length of the loan you are getting matches your needs. There’s nothing worse than getting into a short-term loan when you have a long term strategy with an investment property. Ask for references and do your homework. There are a lot of fee collectors who will take an upfront fee and never provide a loan.
2. Make Sure You Have a Down Payment or Cash Equity
Most private money lenders require at least 10% cash in from a borrower. The more you can put down, the lower the interest rate in most cases. If the property that you are targeting is in need of rehab, some lenders provide rehab loans. You can also use your bank for a HELOC, use your life insurance policy, and even a home depot credit card to fund the repairs.
3. Check your Credit Report
Private lenders look for judgments, tax liens, and mortgage lates. In today’s market, credit is more scrutinized, even by hard money lenders. Work on getting any derogatory removed from your credit report as soon as possible. Have a Letter of Explanation if there are bad marks on your credit to explain the problem and how you will fix it.
4. Check Your Bank Reserves
Make sure you have enough reserves to carry a property beyond the obvious hard and soft costs in the initial number crunching. Particularly on a rehab loan, some lenders will want to see a reasonable amount of reserves to cover unforeseen expenses.
5. Take Advantage of Seller Financing Options
Many sellers are willing to work with you in today’s market. If they won’t carry the entire purchase price, they may carry a portion. Make sure your lender is ok with a seller carry and find out how much they will allow the seller to carry.
Use these tips as guidelines if you’ve never had a private money loan.