What is private money lending
private money lending
Private money lending is a financing arrangement where individuals or private firms lend capital for real estate transactions secured by property rather than relying on institutional bank underwriting. Lender types include individual investors, family offices, and private funds. Loan purposes commonly cover acquisitions, bridge financing, short-term rehab loans and gap funding. Typical loan documents include a promissory note, mortgage or deed of trust, loan agreement, and security instruments. Key concepts to track are LTV (loan-to-value), recourse versus non-recourse provisions, escrow handling, and title insurance to protect lien priority.
- Recourse vs non-recourse: recourse loans allow the lender personal remedies beyond the collateral; non-recourse limits recovery to the property.
- Loan documents: include promissory note, mortgage/deed of trust, and sometimes personal guarantees.
How private money lending works for real estate
For investors and borrowers focused on local deals, private money lending real estate transactions emphasize asset quality and exit plans over long credit histories. Underwriting criteria are often collateral-driven, with lenders reviewing property condition, comparable sales, rehab scope, and projected exit (sale or refinance). LTV standards typically range from 60%–75% of after-repair value (ARV) for rehab deals, and lower for acquisition-only loans. Lenders also consider DSCR where rental income is relevant. Collateral is secured by a lien; lien priority is established by recording order—critical in Fulton and DeKalb counties where recording sequence affects enforcement.
- Underwriting: asset-focused review, proof of exit strategy, contractor bids.
- LTV and lien priority: lenders protect position through appraisal and county recording.
Costs, pricing and typical loan terms
Private lending money carries higher costs than bank loans due to shorter terms and higher risk. Interest rate ranges commonly fall between 8%–14% annual interest, depending on risk and experience. Points and fees (often 1–4 points) are charged up front and affect APR. Amortization is frequently interest-only with a balloon at 6–36 months; some loans require monthly amortization. Prepayment clauses vary; some lenders charge yield maintenance or days’ notice penalties. Examples: a 12% interest loan with 2 points and a 12‑month balloon will produce a materially higher APR than interest alone, so buyers should compare APR and total costs.
- Typical terms: 6–36 month terms, interest-only payments, 1–4 points, 8%–14% interest.
- Comparisons: private money vs hard-money vs bank/construction loans — private money is often more flexible than bank loans, similar to hard-money on pricing but may offer longer relationships and personalized terms; bank loans typically have lower rates but longer underwriting and stricter covenants.
Risks and borrower eligibility
Borrowers should understand default scenarios and foreclosure process in Georgia. Default may lead to foreclosure, sale, and deficiency actions if the loan is recourse. Eligibility focuses on the asset and exit plan more than FICO: collateral value, rehab plan, borrower experience, and proof of funds matter. Risks include project overruns, market shifts, and problems establishing lien priority. Title insurance and clear title work reduce risk. Typical closing timelines are 30–90 days depending on due diligence and permitting.
- Default and foreclosure: Georgia non-judicial and judicial processes vary by lien type; completeness of title and recording date matter.
- Eligibility: asset-based qualification, experience, and documented exit strategies often trump traditional credit scores.
Georgia & Atlanta legal and market considerations
Local legal and market factors influence private money lending. Private money lending laws in Georgia set state-level rules on usury and licensing; some transactions may require examination under state lending statutes. Recording in Fulton and DeKalb counties determines lien priority and timelines — timely recording is essential. Zoning, HOA rules, and rehab permit timelines in Atlanta can affect project feasibility; expect permit lead times that may extend rehab schedules. Local cap rates and comparable sales inform valuation and lender decisions. Consult a qualified local advisor for compliance questions; this article does not provide legal advice.
- Recording: Fulton/DeKalb recording order affects lien priority.
- Permits and market: rehab permit timelines in Atlanta can extend projects; use local comps and cap rates in underwriting.
Steps to close a private money loan
Closing follows a practical checklist: initial term sheet, due diligence (appraisal, budget, title search), underwriting review (LTV, DSCR where relevant), title commitment, escrow setup, and funding. Title insurance and clear recording ensure lien priority. Typical timelines range from 30 to 90 days from term sheet to funding, depending on appraisal and permit needs. Borrowers should prepare contractor bids, proof of funds for rehab, and a clear exit plan to speed closing. A private money lending guide can help first-time borrowers understand required documents and common pitfalls.
- Due diligence: appraisal, title, environmental check, contractor bids.
- Funding timeline: commonly 30–90 days; faster closings possible with prepared paperwork.