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With current interest rates reaching historic lows, one might assume that it should be easier than ever to obtain a mortgage loan, especially since lower interest rates make mortgage payments more affordable.
However, today almost 100% of the loan products offered by institutional lenders are strictly “prime” loans and are available only to the best qualified borrowers who have perfect or nearly perfect credit, income and employment. Furthermore, the property, which acts as collateral, should be eligible as well as in top shape.
One of the most significant by-products of the most recent financial crisis, and the ensuing “Great Recession”, was the effective disappearance of “alternative,” also known as “non-prime,” mortgage loan products.
In the past, when borrowers looking to buy or refinance a property didn’t have high enough credit scores but had solid jobs and income, they could qualify for alternative mortgage loans, which came with higher interest rates for additional risk. Gave compensation.
Lenders who were making these types of loans demanded one to three percentage points higher interest rates than “prime” loans. The higher rates were considered sufficient to offset the additional credit risk.
In today’s market that would make interest rates on “non-prime” mortgages around 5% – 7%. However, these mortgages were virtually wiped out due to an excess of tighter financial regulations and the effective disappearance of the private secondary mortgage market.
Also, due to tough economic times, many real estate buyers and owners who have solid down payments or good equity in their properties can’t qualify for prime mortgages because of low FICO credit scores or because they can’t afford another loan. Loans are not meeting the eligibility requirement.
In some cases, it is the property, not the borrower, that does not qualify for financing. This is common in the case of the purchase or refinance of foreclosed properties or so-called “fixer-uppers”, which are properties in need of significant repairs.
Private placement loans, sometimes called “bridge financing” or “hard money”, can provide a viable financing option for borrowers or properties that do not qualify for prime loans.
What is Private Placement Loan? In essence, it is a mortgage loan financed through a non-institutional lender such as a non-public pension fund, IRA retirement account, hedge fund, investment group, mortgage broker, and/or private lender, primarily asset-based. Is.
These loans require a high down payment (purchase), or a substantial equity position (refinance). In some cases multiple properties may be cross-collateralized as security for the loan.
Typically, private placement loans are short-term (two to five years) and are used as temporary (bridge) financing, not permanent loans. Here are two real-life examples of how this type of financing was used effectively.
Bob (name has been changed) was a real estate investor looking to purchase a low-sale condominium property at a substantial discount. Bob was a solid borrower with excellent credit, a job, income, and a large down payment. However, the project where the condos were located had a pending lawsuit between the homeowner’s association and the developer.
No major lender would lend on it, even though the condo unit was not directly involved in the lawsuit. Bob got a really good price on the condo, about 30% below market value.
He paid very little and our firm secured a private placement loan for him, which was funded in about three weeks. Bob thinks he will sell, refinance, or pay off the property within three years. In the meantime, this condo is an excellent investment rental for which he paid about 70 cents on the dollar.
The second example shows how private placement was used to help property owners to save their equity through refinancing. Mark and Joan (names have been changed) were the owners and operators of a successful business for over 30 years. He owned a commercial building and several income properties, most of which had significant equity.
When Mark was diagnosed with a serious illness and could no longer work, his business took a turn for the worse and eventually had to close. His primary source of income was gone and so was his savings and good credit rating.
Soon they defaulted on their mortgage and the bank called the loans due and payable. The lender initiated the foreclosure and Mark and Joan were unable to refinance their property due to poor credit ratings and low incomes. In addition, there was some deferred maintenance on his properties, which made it very difficult to sell them in status quo.
When Joan contacted us, she was in dire straits. They had no money to cover the defaults and were about to lose their properties with substantial equity. Our firm was able to arrange a private placement loan with a non-institutional lender, which was funded in approximately four weeks.
The new mortgage paid off all existing debt and gave Mark and Joan much-needed cash reserves, including additional money to fix up the properties. After about a year, Joan was able to sell off her commercial and income properties and cash out her equity. The private placement loan was paid off in full and borrowers saved hundreds of thousands of dollars in equity.
Here are the basic features of private placement financing:
- Loan must be secured by real estate (all types of properties are considered, cross-collateral can be accepted)
- Loan-to-Value (LTV): 50% – 75% of the appraised value (less in case of vacant land)
- Loan amounts range from $100,000 to $5,000,000+
- Typical loan term: 2 – 5 years (longer terms available)
- Typical interest rates: 8.9% – 12.9%
- Quick money, usually in 3 – 5 weeks
Obviously, private placement loans are not suitable for every lending situation and are rarely used as permanent or long-term financing. They require solid equity and interest rates are higher than those of prime loans. However, these types of loans can be especially useful when major lenders are unwilling or unable to lend due to the needs of the borrower or the property and/or when quick funding is needed.
In most cases private placement loans are used as “bridge” financing, allowing borrowers to quickly acquire an attractive property or refinance their property to preserve equity or obtain cash-out. Is. Typical existing strategies are refinancing or selling the property.
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