Private money lending is GREAT! I love the concept of being able to borrow money at 10-12% with 4 points, for a period of 6 months. After that, I love it more when the lender penalizes me each month thereafter until I am able to get a refinance completed. I kid, of course, but that is the reality with one of my clients right now.
He purchased a 4plex for $200,000, and was given another $58,000 for rehab costs to fix the place up. That purchase was done 2 months ago, and should appraise out around $320,000. He now is ready to refinance the note to a conventional loan at a much lower interest rate, so he can payoff the private investor.
Let me back up by saying I think Private Money Lending is a fantastic tool to help a buyer not only get into a property, but to also give them the rehab money to fix up the property. From a strategic standpoint, some might say this is even better then doing a FHA 203K Streamline, as long as the new loan avoids the mortgage insurance.
It is important that YOU, the home buyer, know ALL of your options with REHAB lending, not for the actual rehab itself, but for the takeaway financing after the property appraises out. Many lenders want seasoning for 90 days, six months, and some even a year.
I was able to get this buyer 75% of appraised value with 2 months of ownership, and I am able to count the 2 lease agreements he has in place as rental income right now. That actually saved the loan, reducing the Debt To Income, and the best part..NO MORTGAGE INSURANCE. But some people do not fair as well, or as lucky, and the FHA 203K loan might make more sense.
It is very important to have an exit strategy when working with Private Money Investors, because if you don't, you will pay for it, over and over again, until you can get conventional or FHA financing.
Here is an examply of an FHA 203K loan and of a Rehab Loan.
1. FHA 203K Loan
Purchase Price is $150,000
Rehab Cost - $200,000
Interest Rate - 4.125% 30 year fix
Principal and Interest - $1696.27
No origination POINTS -
Mortgage Insurance based on $350,000 Loan Amount - $350.00 per month
Assume Taxes and Insurance are $300 a month
TOTAL PAYMENT - $2347.27 estimated
New Appraised Value - $400,000
2. Private Money Loan
10% Interest Only Payment - $2916.67
4 points -- $14,000 fees
Purchase Price - $150,000
Rehab Cost - $200,000
No Mortgage Insurance
Taxes and Insurance - $300
TOTAL PAYMENT for six month term - $3216
Your payment is $869 higher with the Private Lender, plus another $14,000 in fees.
FHA 203K Loans are an amazing tool to give you the Rehab Money you need for a Purchase or Refinance, without ever having to refinance again, unless it is to just drop the mortgage insurance when you get to 80% LTV or lower.
If you would like to know more about FHA 203K Loans, and how they can help you on your next purchase or refinance, you can click here.