Do you have a paper allergy? Or more likely, a paper phobia?
If you’ve done the mortgage process for your own home, you probably don’t want to go back there just to get into the fix and flip business. The hand cramps from signing your name so many times. The niggling of fear about what’s really in all those papers you just signed. The numbness of realizing you just committed to the next 30 years of your life.
Not to worry. Working with a private money lender is nowhere near as stress-inducing as dealing with all that mortgage paperwork. Still skeptical? Check out these simple steps of getting approved by a private money lender.
Getting Set Up
If you want to be prepared to move quickly when you find your first fix and flip opportunity, you can have some of the initial application done in advance. First, a private money lender will need the basic information on you and/or your business, if you are applying as an entity.
A private money lender is primarily basing the loan on the value of the house, and not so much on your credit. While your credit will still be considered in a decision, your scores don’t need to be in the top tier to get approved.
You will need a personal guarantee for your loan, be that a statement of collateral on a personal residence or a personal guarantee from a friend or relative, someone other than your spouse. A guarantor does not need to put up money, but will be on the hook if you default on your loan.
You’ve Found a House
With the preliminary information in place, you are ready to move quickly and can secure a loan on your potential fix and flip project within 24 hours.
A private money lender will need the specifics about the house you seek to purchase, all basic information that can be provided through an online form.
For a private money loan, you will be expected to put up 20 percent to 30 percent of the purchase price, plus pay one or two months of interest on your loan amount. A private money lender seeks to have no greater stake in the purchase price than 70 percent to 80 percent (loan to cost or LTC) and no greater than 65 percent (loan to value or LTV) of what you expect to sell the house for once you’ve completed the rehabilitation.
After you’ve provided the information on the house, the private money lender will have one of their appraisers or a contract appraiser check the property and ensure your numbers are realistic, so they can be assured you’ll be able to sell the house for well above the value of the loan.
Once the valuation has been confirmed, your loan will be approved, normally within 24 hours of your application. This allows you to move quickly on the house and hopefully convince the seller to accept even a little less money as you’ll be able to get the cash in their hands so quickly. The private money lender will hold a first lien on the house to ensure they are first in line to get their money back.
You also could qualify for a rehab loan from the private money lender, as long as you don’t top that 65 percent threshold they like to maintain.
During the rehab period, you will be required to pay the monthly interest on the loan. When you sell the house, you pay back the principal and remaining interest, and the remainder of the sale price is your profit.
The whole process is designed to take place in six to nine months, giving you time to make your needed repairs and upgrades and get the house on the market and sold, putting the profit in your pocket quickly and simply.
Contact us to learn more about how simple dealing with a private money lender can be and how you can leverage your available cash to tackle as many fix and flips as possible.
Center Street communications are not intended to provide business, legal, tax, investment or insurance advice. No Center Street communication should be construed as a recommendation for any business or investment strategy by Center Street or any third party. You are solely responsible for determining whether any investment, investment strategy, business strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.