Summary:

Institutional loans usually have better interest rates and longer terms, while private money loans typically have higher and shorter rates. Why is there a difference? It's like apples to oranges. Banks fund loans using depositor funds and prefer them to remain outstanding for the loan term. Private money investors prefer shorter periods to keep close to their money, roll with the market, and pivot to liquidity when needed.

Article:

On the flip side, private money loans offer a quicker and less stringent approval process, providing relief for borrowers looking to sidestep the potential complexities of dealing with banks.

Similar underwriting standards include:

• Usually, there is no up-front fee to mortgage brokers other than the cost of the appraisal and maybe the credit report
• Loan application
• Personal financial statement
• Schedule of real estate owned
• Current rent roll
• Property income and expense statement
• Purchase/sale agreement
• Projected closing date
• Define ownership structure
• Organizational documents
• Appraisal
• Environmental (phase 1 for commercial)
• Insurance

How Banks can disappoint borrowers with all the prohibitive terms and conditions:

• Upfront so-called good faith deposit generally nonrefundable, of $10,000 to $15,000
• The lender may not receive regulatory disapproval.
• Withdrawal: if the borrower backs out, some banks, such as .125% of the loan amount, the bank wants a fee.
• Modification of Loan term: The Bank may charge a fee of $500.
• Specified debt coverage ratios such as 1.15
• The borrower must maintain a liquidity reserve of $50,000 in bank deposits, called a go-dark reserve.
• For example, if a borrower aimed to net $150,000, they might be required to borrow $200,000 plus costs, or $225,000, potentially leading to significant savings with a private loan. This potential for savings can bring a sense of optimism to potential borrowers.
• The lender would hold $50,000 back for 15 years, but the borrower would pay interest.
• Paying interest on principal not received dramatically raises the effective interest rate to the point where private money lenders can compete.
• The account is restricted and must remain in the bank for the life of the loan for tenant risks of vacating.
• There was a prepayment penalty for the life of the loan.

After careful consideration, the borrowers chose a private loan with a 30-year amortization, a 5-year due date, no hold-backs, and no prepayment penalty after 120 days. This flexibility empowered them to tailor the loan to their specific financial needs.