Private Money Lending? What's the norm?

Question

Hi there I am getting ready to do a deal  in Northern Kentucky/ Cincinnati OH, and I have finally figured out how to get pre-approved conventionally, I am moving out of my primary residence (and turning it into a short term rental) and going to move into this new property for some time to take advantage of a 5% down payment and better Interest rate.

However I was originally going to get the cash to close (about 30k-50k depending on the offer) by opening up a HELOC and utilizing that. well unfortunately that will crush my DTI and disqualify me conventionally. (I do not have the capital to go the DSCR route.) So I was looking into private money lenders for the c2c so I could get the deal done. I can then turn around and open a HELOC on property 1 after closing on property 2. I would use the HELOC to payoff the PML or keep it until it gets paid off with STR income depending on the rates.

Thoughts? how is private money usually structured and where would I go to find it? Or is there another way to get all this done? Thanks in advance for all the help. Feel free to message me or reply!

Joseph Cornwell · Answer

Cincinnati/NKY investor here as well.

I have lent, and I am currently borrowing at 12% APR interest, paid monthly, 12 month balloon on the principal. No other fees. In the past I had 8-10% APRs on private money. It can be secured by a promissory note or recorded mortgage on specific properties. I have borrowed at 8-10% in the past but with commercial lenders at 7-8% right now, the spread is a bit higher on private money. It is also a larger sum, and quick and convenient, I am willing to pay a bit more for the convenience as well. That is what I would offer/seek to your network.

Jared Fracker · Answer

@Matt Devincenzo thanks for your reply

So the current property would become a LTR so they can offset the current mortgage payment to get me under the DTI requirements.

And since I am a business owner the purchase is not going through me anyway, it is going through my W2 fiancé. So I would take on the PML and then "gift her" the down payment & CC amount. That way it meets the lenders requirements.

Matt Devincenzo · Answer

@Jared Fracker based on your description I don't think that your plan will work...you cannot borrow the DP for the conventional loan, and you still need to declare the loan of the PML so you'll still take a DTI hit. Also I believe for the home your leaving they won't add the income from the STR further hurting your DTI. If you made your current home a LTR then they could give you 75% of the rent to offset the expenses which may help, or at least neutralize the hit to the DTI.

Doug Smith · Answer

Hi @Jared Fracker, Based on what you describe, you'll likely have to work with an individual lender and not an institutional lender as most institutional lenders are going to require more down than you have to put down for a DSCR deal. If you don't have the capital for DSCR (20%-25% down), then an institutional "Bridge Loan" would demand more down. I say that assuming you are correct in that conventional-type financing won't work due to your DTI. An individual person that lends privately will often not be as strict with LTVs, etc.

Jamie Jones · Answer

Hi @Jared Fracker, if you aren't on the loan for the new property, then why would getting a HELOC on your current primary impact the DTI? As long as the HELOC is only in your name and not your fiancé's, that may be the best path forward. Have you talked to the lender about using your business income to increase loan's qualifying income (therefore decreasing DTI)?

Brandon Scott · Answer

@Jared Fracker it sounds like you need a hard money loan, but I'm not totally clear from your scenario how you would collateralize it.  Is the current home you own owned free and clear so that the hard money lender can place a first lien on it?  If not, do you have something else you can provide as collateral to close this deal?

If you resolve the collateral question, typical terms for hard money loans these days are somewhere in the 11-14% apr range, a few points origination fee, often with interest-only payments with a balloon payment covering the principle due at the end.

Jared Fracker · Answer

Thanks for the quick response @Doug Smith.

Yes, I I know DSCR loans and bridge loans and investment loans are out for me. I did find a way to get the loan pre-approved conventionally. My problem is I can not use the HELOC for the Cash to Close, It will raise my DTI and unqualify me.

So I can get the deal done, I just need to find some private money or a hard money lender for a few months to get the capital for the cash to close, and then after closing I can take a HELOC out on the first property and pay off the PML. My issue is I don't know how that interaction/transaction works with them and I am not connected with anyone like that. That's where I am looking for help.

Private Money Lending? What's the norm?

Most Popular Reply