Private Money

Although most people are familiar with mortgages and other real estate financing instruments handled through a bank or through a government agency like the Veterans Administration (VA) or the Federal Housing Administration (FHA), etc., money is also available through private individuals and investment groups, organized in a variety of ways, who specialize in real estate investment financing. Money loaned with real estate as security from these sources is referred to as private money.

All sorts of real estate financing is available through private money lenders. Most private money lenders specialize in one particular type of lending or another. There are private money lenders who offer short term construction loans; other private money lenders offer refinancing packages; still other private money lenders make purchase loans that resemble conventional real estate financing. There are private money lenders who will loan on vacant land, on industrial properties, residential units—the list goes on and on. Private money is most often used to finance commercial properties, and other real estate developments, but is also available to individuals who are looking for purchase money or refinance money.

There are also private investors who will take a second position – that is, usually for a higher interest rate, the investor will loan money that subordinate or in a junior position to the first – if there is a foreclosure, the holder of the second is paid after the holder of the primary mortgage.

Just like traditional lenders, private money lenders make their money from the interest charged. Private lenders can be more flexible about the criteria they use to determine who they will make a loan to and what sort of real estate they will make the loan on. A private money lender may, for example, be willing to lend to people with less than perfect credit, or one whose income is difficult to verify. A private money lender might be willing to loan money on a property that, for one reason or another, is considered more risky. Perhaps the property is in a marginal area or it's known that getting permits will take longer than usual.The exact criteria vary widely from private money lender to private money lender.

Not surprisingly, private money lenders often charge more interest than their more traditional counter parts because they are assuming a larger risk.

Private money lenders usually require Private Money Insurance (PMI) to protect their investment. The barrower pays for the PMI – it's often figured into the actual loan.

How well private financing might work for you depends entirely on your specific situation.

Because there are so many variables when it comes to securing private money to finance a real estate purchase, it is imperative you deal with an expert.