This Non-Traditional Financing Solution Lends Money to People Rejected By Banks Want to buy an investment property, but don't qualify for a traditional loan? When banks say no, this lender says yes.

Real estate investing is big money, but not everyone qualifies for loans from big banks and other traditional sources. Yet there are private lenders willing to lend money.

Private money is a way for BIZ Experiencess with bad personal credit to become small business owners and flip houses. This makes small business ownership more accessible to traditionally underserved communities, such as minorities, immigrants and refugees.

Private money lending is generally funded by investors, banks or both. Lenders take funds from private investors and make private business-purpose loans with those funds.

Investors expect a decent return, and interest rates from money borrowed from banks can be high for private lenders. These factors raise the private lender's expenses, which are passed onto the ultimate borrower. Unlike with angel investing, a borrower gives away no ownership.

This article will outline what private lending is, why it can be the best choice for a house flipper and what a borrower can expect. Find out how to get approved and what lenders are looking for.

Related: 5 Reasons Every BIZ Experiences Should Invest in Real Estate

Why choose a private lender?

For a house flipper with a bankruptcy or other flaw in their past, it can be hard to get more traditional types of financing.

Banks must work within governmental and quasi-governmental agency programs, like Fannie Mae and HUD. Regulations often dictate which businesses a bank can lend to, and what borrower profiles should look like.

With those kinds of lending institutions off the table, a house flipper will need to expand their search for financing. Fortunately, private lending is a place where they can turn.

Private lenders, while still subject to state and federal laws, are significantly less regulated. They can be more flexible in the types of loans they make, and who their customers are. Hence is it generally easier to get approval from a private lender.

Private lenders can customize loans based on internally set criteria, like credit scores, loan-to-value ratio, and debt-to-income levels. They are more creative and investigative in qualifying income. They may overlook background flaws upon explanation.

What is hard money lending, and why would you want it?

A hard money loan is a type of real estate loan issued by a private lender for non-owner occupied property. These loans are usually short-term, between six and 36 months, with a higher interest rate than traditional bank loans.

Hard money loans are approved based on real estate value versus borrower creditworthiness. These loans are approved exceptionally fast, often within two to four weeks. They are almost always given by a private lender and used for non-owner-occupied real estate.

These loans aren't regulated like consumer mortgages. Hence hard money lenders can charge higher interest rates and fees and get away with terms not allowed with traditional loans.

The Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) don't often apply to commercial mortgages. But federally insured banks are still regulated by the FDIC, for example. Hard money lenders have no such regulations.

Which types of real estate can be financed with hard money loans?

Some of the most common types of properties for flipping are sold at auction. But auctions move extremely fast. Delays will cost you opportunities.

When you are looking for fast funding, and don't have the time to wait for traditional financing approvals, hard money can be the answer.

Your hard money loan-financed real estate can be any type of non-owner-occupied real estate, including investments. Lenders often prefer a fairly quick exit strategy, so they know they'll get paid by the loan term's end.

Hard money loans are very common with fix and flip properties. Many lenders even finance repairs. These deals are ideal for a lender because flips tend to be completed within six months.

If the lender is financing repairs, they estimate costs and issue draws as the borrower needs them to pay for work being done. This ensures funds are used for repairs and limits the lender's exposure, as they're only releasing small amounts of money at a time.

Hard money lenders also provide short-term loans for residential real estate investment, including multifamily and other rental properties. Investors may use a hard money loan if a rental property needs repairs before a bank will finance the deal.

Related: 9 Things Startups Must Know Before Approaching Lenders

What kinds of interest and fees does hard money lending come with?

Convenience and easy approval come with higher interest on hard money loans since they are higher risk and short-term.

Lenders often charge upfront fees to cover the cost of processing the loan, plus any paid commissions. This ensures they still earn a profit — in case the borrower pays off the loan early.

Common fees are for origination, broker, application, underwriting, document prep, processing and funding fees and can add up to thousands of dollars.

When lenders do credit checks, what are they looking for? What sorts of property values are most likely to lead to hard money lender approval?

Private lenders usually accept average credit. Their main concern is the property's value and the market the property is in, due to higher risk. Lenders want to be able to recover costs in case of foreclosure.

There is a balloon payment at the end of the short term. For fix and flip, the lender knows a borrower can afford it. But for a borrower looking to refinance by the end of the term, they look closely at the borrower's credit and personal finances. A lender may also require a higher down payment to limit risk if the borrower can't pay at the term's end.

For a fix and flip, lenders will want borrowers who have completed at least a few other deals. Smaller lenders usually stick to markets they know and states with strong real estate markets. They often don't prefer rural properties and provide a lower LTV for them.

Takeaways

Private money financing is how real estate investors and house flippers can get funding. Also called hard money loans, it tends to have fast approvals, but higher interest rates and no regulation.

Experienced flippers in urban areas with good real estate markets are more likely to be approved.