The Nonbank Direct Lender Option

When banks say no or are just too slow

Today’s opportunities can vanish by tomorrow. Funding speed is therefore paramount in any investor’s, attorney’s or business owner’s priorities. The quickest closing lenders fund directly from their balance sheets. These include “direct” private money lenders (DL’s), and they provide valuable “make sense” funding for a variety of uses.

FLIPPERS
Long the primary users of DL loans, house flippers can finance the purchase, the repairs and often both needs from these quick-funded loans. For flippers who are short on cash or new to the business, there are also DL’s which will fund nearly the entire transaction in exchange for a share of project equity, thus minimizing the investor’s risk while returning a handsome profit.

RENTAL PROPERTIES
Determining the use of the loan funds is critical in the underwriting decision for private money lending. With rental properties, for example, if the borrower intends to occupy their property for more than 14 days in the next year, the exemptions for loans to either acquire or to maintain/improve the property will be affected.

If the rental property will be owner-occupied within the coming year, two rules apply towards establishing the business purpose exemption:

  • Loans to acquire the property if it contains 3 or more housing units
  • Loans to improve or maintain the property if it contains 5 or more housing units.

Loans for property containing fewer units is not necessarily consumer credit, and LTV/CLTV’s are like Trust Loans.

TRUST LOANS
Most DL’s will not make a trust loan if the borrower intends to occupy the house as their primary residence. That would be a consumer loan. However, if the beneficiary is either intending to sell immediately, perform pre-sale repairs to the property before selling or to make the property a rental, these loans qualify for business purpose uses.

When a trust requires distribution on a share-and-share-alike basis but does not limit a trustee’s statutory authority to make non-pro rate distributions, the trustee may allocate specific assets to individual beneficiaries on a non-pro rata basis. Typical with many smaller trusts, real property may be the largest trust asset, the transfer of which may be eligible for a parent-child exclusion to aproperty tax reassessment.

To protect this exclusion, a loan from a third-party lender, which is secured by the real property, may be taken out prior to distributing the property to one of the beneficiaries. The trustee may then distribute the loan proceeds to the other beneficiaries to equalize the distribution values. Once settled, the beneficiary receiving the property may refinance the loan as necessary.

Third party lenders include, but are not limited to, banks and short-term private money lenders. DL’s can often fund these loans within 10 business days.

CONSTRUCTION LOANS
If a borrower will require closed-end, private money construction financing from a direct private money lender, current regulations stipulate that the borrower will:

  • Need to be an entity (and own the land as the same entity)
  • Or, be a consumer with a ground-up project whose intention is to sell upon completion
  • Not qualify if the constructed dwelling will be their primary residence
  • Not qualify if the funds are used to modify their primary residence

The Consumer Financial Protection Bureau (CFPB) has published “Know Before You Owe”, a guidance for mortgage and construction disclosures.

Properties are usually required to be owned free-and-clear, hillside lots may require builder-financed foundation work prior to the construction financing kicking in, and do not start any work on site until after the loan has funded due to title insurance concerns.

SMALL BUSINESS FINANCING
When small businesses desire to expand, purchase inventory or acquire commercial property, short-term opportunity financing is quickly available from DL’s. The easiest loans to underwrite are those made to an entity with collateralized real estate controlled either by the entity itself or by officers/members of the entity. As with most other DL loans, LTV/CLTV are usually in the 65% and 55% ranges.

Whatever the borrower’s needs, working with a direct private money lender (DL) is a great alternative when the bank says NO or is just too slow.