Off the Beaten Path

Another Use for Private Money

Private money might well be thought of as a multi purpose tool--a tool for getting those tough jobs done. You might imagine it to be a Swiss Army Knife, or better yet, a Leatherman Tool. It is not for those straightforward tasks that you encounter from day to day along the beaten path. It is more of a traveler's tool. And if you are looking, you will continue to find new uses for it all along the way.

Recently I have encountered a particular scenario quite frequently, and it occurs to me that this "new" scenario represents a "blade" that I didn't even know we had. The scenario goes more or less like this:

  1. A good borrower comes to me with a nearly perfect credit history and yet with a mid-score in the low 600s. You have all seen this: The mid-score is low 600s because the borrower is utilizing too high a ratio of the "available" revolving credit (as reported by the bureaus). The borrower, in fact, might be able to handle this debt quite easily (after all: what do the bureaus actually know about the borrower's income?), but from a purely statistical point of view the high ratio is considered risky.
  2. The borrower (or a representative broker) asks Fairfield to provide a private money loan secured either by the primary residence of the borrower or some other real property. The purpose is to consolidate unsecured debt and improve the borrower's cash flow.
  3. Because private money loans are not reported to the bureau (I am not personally aware of any exceptions to this), the ratio of utilized credit to available credit drops significantly (from the bureauís perspective), and within 6-9 months the mid-score has risen eighty points or better into the low 700s. (I myself have personally undergone this precise transformation.)
  4. The borrower, with their enhanced credit standing, is able to get a re-finance loan with more favorable terms through a conventional source, secured by either the primary residence or other property, and is able to eliminate the higher interest private money loan and maintain the higher score.

This may not be the right approach for everyone, but it is certainly an interesting phenomenon, and after all, if you are going to carry one of those Leatherman Tools on your travels, you might as well know how to use it.

--S. Clay Sparkman, Vice President