When deciding to purchase a commercial building, how you plan to finance this acquisition should be your first consideration. If you are not using cash, you must determine your financing options. Some financing options are to obtain a commercial loan from a bank or from a mortgage broker. You may also qualify for an SBA loan and you should definitely explore this option. SBA loans have favorable and attractive terms.
If you have already spoken with a bank or have been denied a traditional mortgage lender, a private money lender might be a viable option.
What Are Private Money Loans?
Private money loans, sometimes referred to as hard money loans, are real estate loans funded with private funds. Private money loans are similar to bank loans — they are comprised of a promissory note and trust deed; however, the requirements for obtaining a private money loan are much less stringent.
Private money loans are based primarily on the commercial property and not the borrower. Private money loans consider the collateral and the property more than the borrower or their credit or financials. The interest rates for private money loans are higher than bank loans; however, the process of obtaining the loan is much faster and easier. If you have a significant down payment and don’t want to miss out on the opportunity to purchase a specific commercial property, obtaining a private money loan is an attractive option to acquire the property. You can refinance and obtain a bank or SBA loan at a later date.
What Do I Need To Be Approved For a Private Money Loan?
Private money lenders do not require the same criteria or paperwork as financial institutions like banks. Banks make decisions based on the applicant’s credit and financial statements, private lenders look primarily at the commercial property and the collateral. Private lenders do look at a borrower’s credit, but they are much more lax with their standards. If you have poor credit or a high amount of debt, you still may be approved for a private money loan.
If you have a sizable down payment, you meet one of the most important requirements from a private lender. It’s important that you have a down payment of 30% to 40% ready when moving forward with this type of loan. If you don’t have this size of a down payment, a private money lender may be able to offer you a junior mortgage or provide another solution so you can still acquire the commercial property.
What Are the Benefits of Working With a Hard Money Lender?
As mentioned, lower credit standards, streamlined paperwork and processing are some benefits of a private lender. Private lenders can approve and close your loan quickly. Some private lenders will fund your loan without an appraisal. The condition of the commercial property is not as much of a concern to a private lender. Another benefit of a private money loan, leases and tenants are not as much of a concern as they are to banks or traditional lenders. If your building is vacant, a private lender may not be concerned by this.
Be transparent with your hard money lender and understand their rules and parameters before applying. If you need money quickly, however, this could be a great option that will allow you to secure the property you want.