Home buyers turn to private lenders

Home buyers turn to private lenders
By Sue McAllister Mercury News - Silicon Valley Ca.

It can be tough to get a mortgage these days. Banks want hefty down payments and their lending guidelines are constantly changing. So where do some Bay Area residents hoping to close their deals or refinance go? Private money lenders.

Private money lending - also referred to as "hard money" - is a multibillion-dollar business in California. For decades, private money lenders were the real estate market's subprime financing sources, before big banks like Countrywide and Washington Mutual got into the act.

These lenders are individuals or groups of investors willing to make short-term loans to people with bad credit or unusual financing needs, for high rates of return.

Pam Foley, who heads E.F. Foley & Co., a private money lender in Silicon Valley for more than 40 years, said her company is fielding many more inquiries from potential customers this year than last. "But that doesn't mean we're doing more loans," she said. "We're turning down loans because there's not enough equity there."

Generally, private money lenders don't mind if borrowers have poor credit scores. But they require assurance that borrowers can repay their loans on time, and that borrowers have equity in the property that secures the loan. Today, private lenders said, they won't make loans to borrowers who have less than 25 percent or 30 percent equity in their properties.

With real estate values dropping in most parts of California, many homeowners are seeing their equity erode. That means fewer borrowers who hope to refinance can do so - whether they seek loans from banks or from private money lenders.

Typically, interest rates for private money loans are a few percentage points higher than what's available from banks to prime customers. A mortgage from a private money source might carry 10 percent or 12 percent interest. Terms are shorter - five years, for example - though monthly payments are calculated as though they will stretch out for 30 years (known as a "30-year due in five").

Borrowers also turn to private money lenders for high-interest-rate "bridge" loans, or loans that help homeowners buy a new house before they've sold their existing one, for example.

There are established companies that specialize in pooling investors' funds to make loans. But borrowers often find private money by word of mouth, or through real estate agents.

George M. Mattos, a San Jose certified public accountant, has used private money loans numerous times in the past few years. Through his real estate broker, he found an investor and took out a $550,000 first mortgage on a San Jose office building he owned outright. He used the proceeds as a down payment to buy some apartments, and later got a $300,000 second mortgage on the apartments through the same investor when a bank would not make the loan.

Mattos is paying 6 percent interest for five years on both loans he used to buy the apartments. That's less interest than many private money lenders would charge - but it's more than that investor would be earning if his money were in a savings account. "We're both winning."