Private money, within the context of real estate, refers to loans arranged between individual or corporate lenders and individual or corporate borrowers. The money is secured by real estate in the form of a mortgage. Private mortgages are more expensive than traditional lender’s money, but they can be a valuable option for those who don’t qualify for traditional loans or need a quicker turnaround time.
It’s important to note that private mortgages should not be confused with promissory notes. Promissory notes are unsecured loans that come with much higher returns than private mortgages for a reason – the risk is much higher. Mortgages can be in first, second, third, fourth, or nth position. The higher the rank, the higher the risk. Generally, anything above a second mortgage is considered too risky.
Private mortgages do come with costs, including lender fees, broker fees, fees to break the loan, and administrator fees. Individuals or corporations who borrow private money cover all of these fees, as well as legal and appraisal fees. All fees associated with a private mortgage should be disclosed to both the lender and the borrower as early as possible.
Private money lenders can be a great option for borrowers who don’t qualify for traditional loans or need a quicker turnaround time. Private lenders can be more flexible with their underwriting criteria and may be able to close loans faster than traditional lenders. However, borrowers should be aware of the higher costs associated with private money and carefully consider their options before choosing this route.
Summary
Private money refers to loans arranged between individual or corporate lenders and borrowers that are secured by real estate in the form of a mortgage. Private mortgages are more expensive than traditional lender’s money but can be a valuable option for those who don’t qualify for traditional loans or need a quicker turnaround time. It’s important to carefully consider all fees associated with a private mortgage and be aware of the risks involved before choosing this route.
