Private Money Loan
A private money loan is the last-chance solution for borrowers who for one reason or another can not meet the requirements of traditional lenders. This arrangement, also known as a 'hard money loan' may be the last resort for a person who is struggling with an impending foreclosure. Brokers arrange for meetings between such clients and willing investors, in order to work out a solution which will be satisfactory to both. Yet such a procedure is not the easiest matter for either party. The lender, of course, faces substantial risks in dealing with a borrower whose financial situation is not even attractive enough to appeal to subprime lenders. The borrower must accept fairly rigid terms for the money and faces an interest rate which is far higher than that demanded by traditional lenders. (Usually the interest rates are at least in the double digits.)
At times, though, this may be the only course of action which is available to the borrower. If a single mortgage payment is missed, something can usually be worked out with the original lender to help correct the situation. However, if the borrower continues to fall behind even for two or three payments, the lender will usually have to begin foreclosure procedings. At that point, borrowers may find difficulty in locating anyone willing to consider lending him or her money for any reason. A hard money lender may be willing to offer a private money loan. In this way, a bit of time may be bought so that the borrower can sell the original house and repay the mortgage. He or she will still have to find another place to live, and accept an offer which is somewhat below the true value of the home, yet at least this is better than going into foreclosure and losing everything. Borrowers who are struggling with a temporary time of trouble due to illness or job loss may use a hard money loan to ensure that they can continue to make regular payments on a mortgage and perhaps later become eligible for a loan with a better rate.
Persons struggling with foreclosures may make up a large portion of those who seek a private money loan, but they are certainly not the only recipients of this type of loan. At times, persons who own substantial properties need to cash out a significant amount of equity by utilizing a refinancing loan in order to meet some emergency need, or in order to take advantage of opportunities to increase their holdings. People who invest in real estate for a living may also find themselves in this situation. In this case, hard money loan situations enable them to have the cash needed to continue to buy, fix and sell properties for a profit without dealing with all of the restrictions imposed by traditional lenders.
Particular situations may call for a private money loan regardless of finances. Some regular lenders are not willing to deal with rural properties, where the value of the parcel may be in the land rather than in the home. Other borrowers may be planning on constructing a type of building outside of the usual construction techniques (standard frames, concrete block foundations), which may worry some lenders. A home may also be in such a remote location that it could prove difficult to convince a lender to take on such a project, lest it prove difficult to resell the home if the borrower defaults. All of these situations may require a private money loan. If the interest rate is high enough, one can often find a lender willing to take a risk.
However, a private money loan is only a temporary solution. These loans can be expensive, interest-wise, and are somewhat difficult to obtain. The lenders (understandably) are usually most concerned with ensuring that the deal will turn out profitably for themselves, so they are careful not to accept situations where the loan- to-value ratio is not in their favor. That way, even if the borrower defaults, lenders can still profit from reselling the property.
Hard money lenders are often local, so that they can remain knowledgeable about the value of the property and make wise decisions regarding whether a particular parcel of land has enough potential for them to take an interest in the situation. A regular mortgage broker may refer a borrower to such individuals, or newspapers often have listings of those who are willing to engage in a private money loan. It is somewhat unsettling, though, to think of applying for a loan from someone whose ad assures customers that nearly anyone in any circumstances will be considered acceptable candidates for the loans. A person can be sure that exorbitant interest rates are surely not far behind. It looks like this will be a long and profitable (for the lender, at least!) relationship.
Perhaps this is what was in mind when the writer of Proverbs 22:7 wrote, The rich ruleth over the poor, and the borrower is servant to the lender. Borrowing is similar to servitude in that another person is calling the shots, as it were, about many of the things that a borrower can or cannot do in the situation. Also, if one is conscientious, certain personal plans may have to be set aside until the conditions of the loan can be fulfilled. Although the Bible does not forbid borrowing, and gives certain advice as to how to regulate the matter in a godly manner, even a quick glance at verses regarding the topic of borrowing will show that it is generally regarded as an unfavorable situation. Although some situations may call for a private money loan, conscientious lenders should not allow borrowers to participate in such loans if it seems that this is likely to deteriorate the person's financial position even further.
Purchase Money LoanA purchase money loan is also called an owner financed loan or a seller financed lending agreement. When the potential buyer cannot get a mortgage for the full amount of the purchase price, or if the owner has not been able to find a buyer and the only buyer interested cannot get the financing through a traditional means, a purchase money loan may be the answer. This kind of loan will probably become more and more popular as the housing market continues to sink and the glut of for sale properties continues to grow. If this kind of lending arrangement can be made between seller and buyer, it becomes a win-win situation for both. "Jesus said unto her, 'I am the resurrection and the life, he that believeth in me though he were dead, yet shall he live'" (John 11:25) This type of lending agreement is also known as a seller carry back lending agreement.
A purchase money loan is really quite rare, however for one very good reason. The owner has to pay off the mortgage loan before offering to carry it for the buyer and in most cases the seller wants his/her money in order to purchase another house. Few people want to have their money trickle in over a thirty year period, especially if the seller is over fifty. But if the owner has the house paid off and is willing to have the payments trickle in, he/she may be able to demand a higher interest rate on the self financed purchase money loan than could be expected from a bank. And because the prospective borrower couldn't get a bank lending agreement, the buyer really isn't a position to bargain over the higher interest rate the seller is asking for in order to make the deal happen.
A purchase money loan may appear to be a good idea for the seller in a time when there is a huge downturn in housing sales. Yet there is always the temptation to try and cut corners and skip some of the steps needed for a lawful and self protecting home sale, and later on when problems arise, the seller does not have all the documents needed for surviving the inevitable legal battles. It goes without saying that a seasoned attorney who has handled a seller carry back transaction on many previous occasions should be consulted. Trying to do this kind of transaction with merely online help is not foolish but potentially devastating financially. There are upsides and downsides to this whole issue.
The downside to the purchase money loan is that first, the buyers may not pay. Some states have restricted the rights of the sellers in such a situation. Perhaps the seller has a serious medical issue and needs the money faster than it is coming in monthly. Tax issues may not be cut and dry and who wants problems with the IRS? Maybe title or ownership issues arise or the contract is not absolutely clear on all issues. The buyer may agree to higher payments, but who is responsible if the buyer loses his/her job? And what if the seller has a divorce that affects all property issues? How does that affect the purchase money loan?
On the other hand, an owner financed loan does get the house sold, maybe after months or several years on the market. A purchase money loan means that the seller can get top dollar for the house and if the lending agreement is structured correctly, the transaction can provide the seller with monthly income for a very long time. The buyer may be able to buy more house than he/she could through conventional means, better terms can be negotiated and may be able to make a lot of money if the property is a fix-it-upper. In an ideal world, the seller financed transaction can be a good thing for all, but the world is anything but ideal. That's why there are lawyers. Of course, no one says that a carry back lending agreement has to be for thirty years. If a buyer's own financial situation improves over time, he/she may want to opt for a more traditional type of loan, especially if the carry back loan interest rates are higher than a bank loan.
If taking occupancy in a few days instead of many weeks is important and perhaps a brand new job is keeping a person back for residency requirements, and wanting to miss out on all those closing costs sounds good, then a seller carry back lending agreement can be ideal. Of course, everyone wants to avoid the potholes and painful experiences of life that make for some very tough times that try everyone's spirit. Broken relationships and marriages, disappointment in decisions that children make and medical issues with loved ones as well as financial dead ends and trying to find the thing in life each person was meant to do can be excruciatingly painful. Many people have the mistaken idea that God is a rescuer from all these "must avoid" experiences, but in reality, what He is offering is to be a partner and guide through them. The message of the Bible about suffering is that God intends to make His children more like Himself by allowing them to go through the fiery trials of life in order to help others through the same painful journeys. To be more like Jesus, a person has to suffer and in that suffering learn more of God's grace and mercy.