Most borrowers think private mortgages require equity in the property on which they are borrowing. This may or may not be true. Let’s do a quick review of what type of private mortgage equity is expected in a hard money loan.
A private mortgage from a non-bank private money lenders in Maryland is generally based on the asset you pledge as collateral. Most private lending companies or individuals want you to have at least 40% equity in the property (a 60% loan to value). The exact amount of equity varies by private lender and their investors, but it will likely be based on the amount and type of collateral as well as your personal financial situation.
For example, a private lender making a rehab loan or a bridge loan on a $100,000 residential property may require more than forty percent equity because the loan amount is so small. 40% of $100K is only $40K which isn’t much of a cushion if the project goes south. But 40% of a $1,000,000 commercial hard money rehab project, for example, is $400,000 equity which is a much more substantial equity safety net.
If you do not have equity in the project you are working on, many private lending groups will accept other collateral as a guarantee on the loan.
For example, you may own other real estate with substantial equity, or other assets that would satisfy the private investor. Many private lenders are lending their private investors’ savings. So think in terms of what you would want to satisfy you that the risk on a project is nominal.
Remember that obtaining a private mortgage is a loan, not an equity investment in your project. As such, a private lender is looking to minimize the risk of loss.
If you have a project with a high degree of risk with a high loan-to-value investment, you probably need to seek an equity partner and not a private lending group. Engaging with local real estate investing groups is a great way to find a potential partner.
Readmore Different Types of Hard Money Lenders