In a world where public lending organizations and banks have stringent lending requirements, private money lending is a valuable option for borrowers who need money fast with shorter terms. If you’re looking to reap the benefits of being a private mortgage lender, it’s helpful to learn more about the industry.
What are private mortgage lenders? How do they work? What are the legal considerations for being a private lender? This guide explores all these topics, along with the benefits and risks to borrowers and private lenders.
What Is a Private Lender in Real Estate?
A private money lender is an individual or private organization that provides someone with money with the expectation that they will repay the amount. The lender can often be a family member or friend of the borrower. If the private lender is an organization, it is unlikely to be a licensed lending organization or bank.
How Does Private Money Lending Work?
Applying for a private mortgage can be more streamlined than applying for traditional mortgages. Rather than focusing on the borrower’s income history and credit score, private money lenders focus on the overall deal potential and the value of the property being used as collateral. Private loans also generally require a down payment and a written plan describing how the borrower will spend the money.
Additionally, while these lenders do not need to follow the same regulations as public lenders, they still need to follow state usury laws. These laws may limit the amount of interest private lenders can charge and the number of loans they can make.
Some private money loan payments include interest-only payments for the loan term and a single large balloon payment at the end. The terms on private loans are also likely to be much shorter than traditional loans, although sometimes they can last longer.
Benefits of Using Private Money Lenders
Private money lending includes many advantages to borrowers:
- Flexible terms that can be tailored to the borrower’s unique circumstances
- Fewer and less strict qualification guidelines
- Fast and simple application process
- Receive funds faster than with conventional mortgages
- Convenient option for borrowers with lower credit scores and unconventional income streams
- Real estate investors can purchase, renovate or refinance commercial real estate properties quickly
Benefits of Being a Private Mortgage Lender
If you’re considering the benefits of becoming a private lender, here are four advantages:
- Private lenders gain high returns due to higher interest rates
- Better control over loan terms, borrower requirements and the due diligence process
- Private lenders gain a tangible asset, such as real estate, as collateral that backs their investment
- Private lenders can diversify their portfolio with investments and loans in different industries, geography and loan size
Potential Risks to Borrowers
Private lending may hold certain risks for borrowers, including:
- There are often higher interest rates than traditional loans due to shorter loan terms
- Private lending laws have less oversight than conventional lending
- Borrowers may need to refinance or sell the property quickly before the loan is due
- It can be challenging to find good money lenders because they have less advertising than established public lenders
To counter the potential risks of private money lending, borrowers must check whether a private lender is trustworthy and reputable. Learn more about the lender by checking online reviews or connecting with people who have borrowed money from them before. You can also speak with your potential private lender to learn all the details of the loan term, costs and process. Consider talking about your financial plans and private lender options with a financial advisor. A financial advisor may help you select a trustworthy private lender.
Since private lenders rarely advertise, if you have issues finding one, consider asking family and friends whether they know any. Otherwise, you could browse the internet and social media platforms like LinkedIn for a reliable private lender. You may also find them through professional networking or real estate investment events.
Potential Risks to Lenders
Some risks private lenders may experience include:
- Lower or less strict qualification guidelines may cause lenders to provide a loan to a borrower who may be unable to repay the loan
- The process of foreclosing and selling a property can be costly and time-consuming
- If a property’s value decreases, the lender may be unable to recover the full loan amount
To avoid some of these potential risks, private money lenders must do their due diligence before agreeing to offer a loan. Research the property, consider market trends and thoroughly research the borrower since there is minimal government regulation. These precautions may enable you to choose borrowers wisely and maximize your gains as a private lender.
Legal Considerations for Private Lenders
If you plan to provide a private lending service, it’s important to understand the rules and laws you should comply with for long-term success. Here are some essential legal considerations.
Licensing
Before you begin private money lending, take the time to learn about your state’s licensing requirements. For example, some states may require you to have a license when lending, brokering or selling loans of certain amounts or charging interest above a specific rate. For example, in New York, Section 340 of the Banking Law states that a private lender needs a license if they want to charge more than what’s legally allowed for nonlicensed lenders and are making loans of $25,000 or less for family, household, investment or personal purposes or $50,000 for business or commercial purposes.
Usury
Your state likely outlines the maximum allowable interest rates you can charge a borrower based on the loan product, the property securing the loan and the borrower. Consider which types of charges and fees you can include with these rates and whether your state restricts default or compound interest.
Foreclosure and Disclosures
Before lending, you’ll need to disclose certain information to borrowers. Various state and federal disclosures must be provided to borrowers during the application process, during the loan term and at closing. You should also consider foreclosure timelines, whether your state allows nonjudicial foreclosure and whether the lender can claim a deficiency if the collateral does not cover the outstanding debt.
Get Legal Support From Private Lender Law
Are you looking to become a private money lender and reap its benefits? With the industry’s licensing needs and compliance requirements, it helps to work with a knowledgeable legal professional who can inform you about the steps you need to take to build a successful business. Private Lender Law is a law firm that specializes in a comprehensive range of services in the private lending industry.
Some of our services include 24-hour loan closing services, deal structuring and regulatory and licensing services. As you start out in the industry, our regulatory and licensing services help you conduct business according to the laws you should follow in your state. Our knowledgeable professionals also help with loss mitigation in foreclosures to safeguard your investments and minimize losses. For individualized assistance, contact a professional at Private Lender Law in New York or New Jersey today.
