There are a number of reasons that individuals or companies interested in a commercial mortgage might seek out private commercial lenders. These types of mortgage lenders combine attributes of both conventional mortgage lenders (such as banks and mortgage companies) and private investors that may be known by the borrower (such as family members, friends or business associates). Commercial private lenders are comprised of an individual or group of private investors that are part of a commercial lending group or organization which sets its own standards for granting mortgages on commercial properties.
Benefits of Private Commercial Lenders
There are a number of benefits to finding private commercial mortgage lenders to borrow money from. For one, the interest rates, fees and payment terms may be more attractive and/or more flexible than more conventional commercial loans. Another benefit is that a private money lender focus more on the valuation of the property, rather than the borrower's credit history or score. So, if the property has enough equity in it and is deemed valuable by the private lender, they may be willing to offer a loan on the property, regardless of the credit worthiness of the borrower. Another benefit to private commercial mortgage loans is that there is typically less paperwork required and the time frame to be approved for the loan can be much quicker than a conventional mortgage lender.
Differences Between Private Commercial Lenders and Conventional Lenders
Most conventional lenders determine whether or not they will grant a home mortgage loan based on criteria such as credit score, income of the borrower or the potential cash flow of the commercial property. In contrast, private commercial lenders often focus more on the value of the property and will grant loans that conventional lenders might not, as long as the property valuation is up to their standards. Because of the way loan eligibility is determined, the process can often be completed with far less paperwork and in a shorter time frame than with conventional mortgage lenders. Also, since the lenders are private, terms, rates and fees can be more easily negotiated.
Types of Borrowers That Can Benefit From Private Commercial Lenders
Any commercial borrower may benefit from seeking out bad credit loans, but there are certain types of borrowers that can greatly benefit from private commercial lenders in comparison to going the more conventional route. These include borrowers that are:
Those that need to close very quickly on a property may not have enough time to wait for the decision from a conventional lender. This may be because of a contract expiration or due to some other reason. A Private money lender can make lending decisions more quickly because they don't have a formal committee or lending process that needs to be followed.
If borrowers have negative credit histories, such as bankruptcy or mortgage foreclosure, they may not be able to obtain a commercial loan from a conventional lender. Private lenders can determine their own criteria for granting loans and may overlook certain aspects of credit worthiness in exchange for high property valuation or other criteria.
In Need Of A Non-Recourse Loan
If a borrower is seeking a loan in the name of a commercial entity, there may be no one willing to personally guarantee the loan. Banks and other financial institutions are sometimes unwilling to grant a non-recourse loan, but private commercial lenders are more likely to do so.
Unwilling Or Unable To Disclose Information
If a commercial borrower is unable or unwilling to disclose required information needed to determine eligibility for a loan, such as tax returns, P&L statements, etc., a conventional mortgage lender will usually not grant a loan because credit worthiness cannot be established. Private commercial lenders may be willing to overlook this lack of disclosure, as long as they can effectively valuate the property being borrowed against.
Considered To Have Low DSCR (debt service coverage ratios)
Many conventional commercial lenders will calculate the debt service coverage ratio of the borrower's property before determining whether they will lend money to the borrower. This is based on how occupied the property is and what the current cash flow of the property is. Private commercial lenders, on the other hand, are more interested in the value of the property than how cash flow producing the property currently is.
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