Private Lenders – What Are they and What do they lend on?

Whenever someone wants a loan the bank won’t do, they call me and ask, “but don’t you have any private lenders?”

Of course I do, but they don’t lend on EVERYTHING.

Let me start by saying that the title of “Private Lender” doesn’t mean “Stupid Lender.” In fact, if anything, they are the shrewdest lenders out there, and are very concerned about safety of their capital.

Generally, private lenders will not lend more than 75% – 80% of a property’s value. If the property is just land, then than gets shaved to 50% – 65%. If the property is very odd, hard to sell, or “unique” then you can bet private lenders won’t touch it.

Why? Because private lenders do loans that are higher risk than the banks. Therefore, the chance of someone defaulting are higher. If they have to go through the legal process, it may be months, or years, before they get their capital back. With costs and interest, they can end up losing money, so they simply won’t lend beyond 80%. They won’t.

So where DO they lend?

They lend to people with poor credit or non-verifiable income, but WITH equity. They want to see roughly 20% – 25% (or more) equity in a property when their loan is taken into account.

So, let’s say you have a $400,000 home in Surrey. You have a $200,000 mortgage and $200,000 equity. You’ve fallen on hard times, and need $40,000 to pay off some credit card debt. However, you’ve missed several payments, and your bank won’t lend you the money. This is an IDEAL situation for a private lender. There is lots of equity (more than 25%) and they’ll give you the $40K without messing up your low rate 1st mortgage with the bank.

That is just one example, but you get the idea. They want EQUITY in the property whether that is a down payment, or existing equity. You won’t be getting 85% or 90% financing from a private lender. It’s just too risky for the lender.

Other situations they’ll lend:
1. Poor credit
2. No credit
3. Non-residents
4. Non-verifiable income
5. Non-traditional income
6. No income
7. Raw land
8. Serviced Land
9. Former grow ops
10. Construction situations

Nowhere on that list do you see “no equity” or “no money down.” You MUST have equity, and a healthy margin of it. The old saying from private lenders is that they want to see that the borrower has “some skin in the deal,” so that if things go sideways, the get hurt as much as the lender does.

Situations they will NOT lend:

1. Unsecured
2. Businesses and restaurants where there is no land or real estate component
3. More than 80% financing is required

Ultimately, private lenders are just people with wealth that are concerned about losing it. Just because you’ve heard we brokers have access to private lenders, doesn’t mean we have access to lenders that will give anyone money for any percentage of the property. Ultimately, you’ll need equity.

It’s just the way it is.

~ by merc359 on July 14, 2009.