Need help understanding terms of private loan offer

[Devin Berrian]

Hey BP community, 

Here is a little bit of background on our current deal:

5/3 SFH on a quiet residential street in Hudson Valley, NY

List price: $135,000 Taxes $6,000 

Very good condition, HVAC systems are 2009 or newer, kitchen and baths need updating which I can do myself because I'm a contractor.

Having some trouble obtaining conventional loan because my income is reported under a fairly young LLC.

While on vacation this week, my agent e-mailed me the following from the listing agent:

"Owner anxious to sell. Ignore price and bring me an offer Thanks"

So I sent the following to one of my contacts:

"I was wondering if you would be interested in lending some private money and earning back interest on it. I just got a message from my agent today that the owner will consider all offers on this property, and I think he would be very interested if I made an all cash offer of $100,000. I am looking for a loan on half of that. If this is something you might be interested in, please give me a call. Or if you know someone who might be interested, please let me know."

Side note, I actually think I could offer $80-$90k. 

Anyway, I got this response:

"I showed to one of my business associates and he would consider it under the following terms 50 k 1st morg 10% 5 year note based on a 20 year term . 1point upon commitment and 2 points upon closing the loan. You would pay all closing cost. You would also have to pay for an environmental inspection / building inspection. Prepay 1 year home owners insurance and he would also escro for taxes .also he would not want the loan to be paid off prior to the 5 years."

Can someone please help me understand this offer? I would really appreciate it. 

Before I consider this loan anyway, my father is going to cosign the mortgage as a last ditch effort to secure a conventional loan, which will involve paying about $8k in closing costs, and if that financing doesn't get approved, I have someone who may be interested in being a 50% partner in this deal."

[Jeremy Pace]

@Devin Berrian

Ok, he wants first position on the loan, so if you plan to finance the rest of the purchase with a lien against the home, his lien will get paid first in the event of a foreclosure, fire, etc.

The loan will be a 5 year term 20 year amortized at 10% with no prepay.

You pay $500 (one point) to the lender up front that he will likely keep no matter what, and $1000 (two points) more to him at closing.  You pay for inspections, which will have to 'pass' or he likely won't loan you the money.

He wants one year of insurance put into escrow (or prepaid) at closing.  He also wants the taxes put into escrow, likely at least six months worth ($3k would be six months with if your tax number is correct)

So you'll pay this guy $1500 in fees  and Taxes and Insurance up front, plus any other closing costs (title insurance, recording fees, etc.).

Thoughts: request the ability to prepay (even if only in the last year).  It can be a really really huge hassle to line up a loan to pay off a balloon, which is the kind of loan you have ... he wants 60 payments from you, so he'll make about $20k in interest on your purchase over five years.