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Lending Guide: Loan Overview

Private Money Loan Types

2018-10-11T20:16:29+00:00 Loan Overview|

Private money loan types can become a complicated conversation, with loan type categories often having sub-types and further nuance between lenders. You should know that most terms defining private money loan types aren’t legal definitions, but rather attempt to categorize loan contract terms into quickly-identified thresholds. This lack of legal definition also means that you will come across lenders who define these categories differently.

Broadly, loans are categorized by two criteria: the length of the loan (called a loan term) based on its maturity date, and the purpose for which the money will be used.

Because the Private Money Lending Guide is primarily for real estate investing, we don’t cover in-depth the many consumer loans, including personal loans, auto loans, home equity loans and more.

Click the terms below to scroll to that loan’s description:

Blanket
Business
Bridge
Construction
Long-term
Mezzanine
Non-owner-occupied
Owner-occupied
Purchase
Refinance
Rehab
Take-out

Blanket

Blanket loans are designed to relieve the real estate investor’s hassle in dealing with multiple loan payments for different properties. A blanket loan allows the borrower to make payments to the lender on one loan while buying, holding, or selling different properties – all without triggering a “due on sale” clause.

Real estate investors must typically have a great deal of proven experience and history of profitability to obtain a blanket loan. Many times, blanket loan terms do not place limits on the number of properties under the loan.

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Business

The money from a business loan goes to pay the business’s expenses, including payroll, office supplies, inventory, product development and more. They serve as an alternative to accepting outside investors buying a stake in the company.

Typically business loans are for new companies requiring startup capital or existing companies that have a previously proven track record but need additional money for growth or due to temporary issues which require additional cashflow to resolve.

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Bridge

Essentially, bridge loans serve as interim financing until the person or business can find permanent financing. Bridge loans are short term, typically six months to a year. The private lender will want to know what your plans are after the term is finished and that you have – or are working to have – a permanent loan in place.

Bridge loans will be more expensive in all respects, from up front points, to origination costs and the interest rate.

You will most commonly need a bridge loan if:

  • You need to quickly close on a real estate purchase.
  • You plan to resell the property soon.
  • A bank requires other criteria be met (property renovation, loan repayment history, reliable and regular income from the subject property, etc.) before they are willing to lend.

Bridge loans are almost always further defined by what you plan to use the money for.

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Construction

Construction loans fall into two types:

  • New construction: This pertains to building from the ground up, either on a single property or a commercial/residential development. Private lenders will sometimes also want to know nuances on whether the land is raw, has utility access ready to go, etc. New construction is much riskier and more speculative to a lender than existing construction. In addition to all the problems that could cause build delays or halts, there is also the risk that the finished property may not resell.
  • Existing construction: Commonly used to build additions onto an existing structure or extensive repairs requiring a builder. Existing construction loans are sometimes confused with rehab loans. Generally, you are looking for an existing construction loan if your project will require a builder with permitted floor plans and specifications. Whereas you can typically hire any licensed contractor you want for a renovation, builders must generally be approved by the lender.

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Long-term

If you are a solid prospect on the 3 C’s, you may be able to find a lender willing to provide a long-term loan from day one of your purchase rather than having to get a bridge and then take-out loan. Typically these are not for renovation or other projects that will take a long time to complete, but rather because the property already has regular and reliable income from tenants.

Like bridge loans, you will nearly always find long-term loans further defined by how you plan to use the money.

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Mezzanine

Mezzanine financing typically replaces a high-interest credit line with a somewhat lower-interest loan. The lender will often gain (or the ability to later purchase) equity in the business either as a condition of the loan or if the borrower defaults. The loan’s interest is tax-deductible, and payments are more manageable since borrowers can figure their interest into the loan balance. Borrowers also are usually able to defer all or part of the interest payment if needed.

Because these loans can be very high-risk for the lender, they are typically only extended to businesses that have a proven track record and viable growth plans.

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Non-owner-occupied

non-owner-occupied loan is generally a feature of a lender’s product than a stand-alone product. The term does not simply refer to vacant property, but to property you own to make a profit from the property’s resale or passive rental income, and can be for both residential or commercial real estate.

For residential property, if you have legal dependents living on premises it may still be considered owner-occupied even if you are charging them rent, especially if you own the home because they are unable to qualify for a mortgage. You will want to check with the private lender or a real estate attorney to be certain, as owner-occupied status comes with additional protections.

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Owner-occupied

Owner-occupied refers to any property in which the borrower resides, and includes both residential and commercial property

  • For residential property, this pertains to the borrower living in the home as their primary or principal domicile or as a secondary or vacation home. Owner-occupied status often includes spouses and legal dependents of the borrower. “Legal dependents” typically refers to immediate family (children or parents) without sufficient income to qualify for a mortgage on their own. Residential owner-occupied status comes with many additional consumer and regulatory protections regarding loan terms, loan servicing and foreclosures. This crucial distinction means than many private lenders will only lend on non-owner-occupied residences.
  • Commercial owner-occupied refers to a business that operates out of property it owns and for which it does not charge or receive rent.

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Purchase

These loans are like fixed-rate (set interest rate for the loan term) and adjustable-rate (interest rate that fluctuates based on market interest rates) mortgages. Purchase loans may be bridge or longer-term, but the money is used solely to purchase the property.

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Refinance

While a refinance may seem like a take-out loan in that they are both intended as long-term and replace another loan, they are completed for different purposes. A borrower may choose to refinance not because they have to due to another loan reaching its maturity date, but because they can get a better interest rate or want cash out of the property from its existing equity. This kind of loan is sometimes also called a cash-out, or cash-out refinance, loan.

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Renovation

Renovation loans are a niche product provided by a select group of rehab lenders. Reno lenders generally are hard money lenders with a higher level of understanding of rehab projects than a typical lender.

There are many different types of renovation loans, but they all essentially accomplish the same thing: modify an existing property so it’s worth more remodeled than it was when you bought it. Common terms for this category of loan include reno loans, fix-and-flip loans, rehab and rehabilitation loans.

In the private lending industry, rehab loans are a type of bridge loan, and may be for:

  • Owner-occupied residential, where the borrower is using the funds to renovate their own home
  • Non-owner occupied residential, typically to rehab the property for tenants. You will also find in this category the even more specific fix-and-flip loan, which is a niche rehab loan for non-owner-occupied residential property being repaired for resale.
  • Commercial property where the borrower is using the funds to repair for their own business, for rental income, or for resale.

You should expect that the private lender may only release your funds as they verify that the renovation has reached certain benchmarks. Make sure you clarify exactly how and when the lender pays out so you’re not in a position where the contractor needs additional capital that you don’t yet have.

If you know you will need financing to both purchase and renovate a property, it’s best to look for a lender willing to do both in one loan, or check that your purchase lender is willing to accept a junior lien (and then have a junior lienholder ready to go). It can be difficult to add a junior lien or second mortgage due to the greater risks a lender takes if you should default on the loan.

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Take-out

A take-out loan is the subsequent money used for permanent financing, often referred to as such because it pays back (“takes out”) the bridge loan. They are usually amortizing mortgages with fixed payments. If possible, it is best to first try to find a bank willing to complete this kind of loan as their terms are usually better.

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