Home buyers turn to private lenders...

As a result of the credit crunch and many financial institutions requiring large down payments, borrowers with less-than-perfect credit scores are turning to private lenders to refinance homes and commercial projects. Private lenders are individuals or groups of investors that offer short-term loans, often with high rates of returns. For many years, private lending served as the real estate market's subprime financial source, prior to more traditional banks entering the arena. In 2007, $3.3 billion in privately funded loans were made in California.

MAKING SENSE OF THE STORY FOR CONSUMERS

·Although private lenders cater to borrowers with poor credit scores or unusual financing needs, they do not approve everyone. Private lenders still require assurance that borrowers can repay the loan within the agreed-upon time limit, and that borrowers have equity in the property. Many private lenders require borrowers to have a minimum of 25 percent equity. If the borrower is unable to repay the loan, the private lender can sell the property, similar to repossession by a bank.

· While private lending may seem like a viable option for some borrowers, it also has its disadvantages. For example, interest rates for private money loans are higher than the rates offered by standard financial institutions to prime borrowers. It is not uncommon for a private lender to offer an interest rate of 10 percent or more. Additionally, the terms with a private lender are shorter than with a traditional bank, sometimes as short as five years. The payments, however, are calculated as a 30-year loan. Some loans, both by private lenders and traditional banks, also have balloon payments, meaning that once the loan matures, the remaining balance in due in one lump sum. With a bank, the balloon payment is normally due after 30 years, whereas a private lender typically requires the balloon payment after one or two years.

· Some borrowers with high credit scores also are turning to private lenders for assistance, because private lenders do not require a property to be appraised prior to funding the loan. Private lenders benefit from the partnership because they earn more interest by lending to a borrower than they would if their money was in a traditional savings account. However, private lenders are difficult to find and most only operate within limited geographical areas, because they like to view the properties they're lending against and prefer to know the market in that area.


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Source: C.A.R. 8/14/08