Private mortgage loans are made by private lenders instead of traditional financing sources such as banks, lending institutions, or government agencies. They usually are short-term (6 months to 3 years) hard money or asset-based loans, and the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower`s credit.
The most important parameter private mortgage lenders consider when evaluating a loan request is LTV ratio. They typically will lend up to 50 percent on raw land or undeveloped property; 65 percent on commercial income producing property such as office buildings, shopping centers, and warehouses; and 70 percent on multifamily income property such as apartment complexes. The maximum amount usually will be lent if all criteria are met; lower amounts may be lent if the loan or borrower is considered less than ideal.
The second parameter is the type of properties to lend on, which often is determined by the ease in disposing of the property in case of default. Obviously, a single-use property that would take a year to sell is less desirable than a multi-tenant, income producing office building.
The third investment parameter is the cash flow or income potential of the property put up as collateral. Although many private mortgage lenders are liberal in this area, the monthly interest payments must come from somewhere. If the property is producing a cash flow after all expenses, the property income alone may cover the monthly payments without the borrower having to come out of pocket. This adds a great degree of safety to the note. Cash flow from other income properties also can substitute for cash flow from the property being placed as collateral.
The fourth major investment parameter the lender must consider is exit strategy, or how the borrower plans to repay the loan. Since most private mortgage loans are short-term, private mortgage lenders
have a keen interest in analyzing whether a particular exit strategy is viable. For example, if the exit strategy is to refinance the property, the lender must determine if the credit score of the borrower is high enough to qualify for a long-term mortgage, if the property cash flow is sufficient to cover the debt payments, and if the property will meet the general criteria set up by the mortgage lenders most likely to refinance the property.