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Private mortgage lenders have helped many people who may not have met the stringent requirements and prerequisites of a traditional mortgage to purchase real estate. This type of lending provides consumers with options that they may not have if they took the traditional route. Sometimes consumers prefer private mortgage lending not because they cannot qualify for a bank mortgage but because it lacks the terms they need. Wondering if private mortgage lending is for you? Stick around, and we’ll share some more information to help you make the right decision.
Who is a private mortgage lender?
A private mortgage lender can be a friend, family member, or even a business that offers a mortgage loan to a borrower often with less stringent terms. Some individuals specialize in private lending as a form of investment. Since private mortgages do not have to fulfill all the prerequisites present when taking a loan from a bank, they fill in the gap in the market for those who are unable to qualify for traditional loans.
Most private mortgage lenders will offer financing as a:
- Favor to a friend who is unable to meet strict mortgage terms offered in banks
- Form of investment
To identify a suitable private mortgage lender, we recommend using Certified Mortgage Brokers. These are professionals with an extensive network of lenders who can fit different circumstances. You will get the professional help you need to find a lender that matches your needs.
Common buyers of private mortgage loans
Private mortgage lending can work for individuals facing different financial circumstances. It’s not just an option taken by those who cannot qualify for a mortgage in traditional banks. Some common buyers of private mortgage lending include:
Self-employed borrowers: Many of those who are self-employed may not have all their income sources traceable and documented, which makes it difficult for them to qualify for bank loans.
Young homebuyers who don’t have a credit history: If you are looking to buy a home and already have a healthy income but no credit history, you may not qualify for a loan in a traditional bank. You can turn to a private mortgage lender for a suitable offer.
Real estate investors looking for immediate returns: Private mortgage lending also helps time-crunched investors who are unwilling to undergo the lengthy underwriting and due diligence process required by most traditional financial institutions.
People with bad credit: The largest group of private mortgage loans are often offered to people who do not have a good credit score and cannot qualify for a traditional loan. These people can be connected to private mortgage lenders who are willing to review their situations and offer favorable terms regardless of their poor credit score.
House flippers: These are people who purchase real estate at a low price and then renovate it to quickly “flip” or sell it to a new buyer at a profit. They often present unique circumstances that banks may find too risky to qualify for a traditional loan.
What’s the difference between private lending and bank lending?
Both private lending and bank lending offer consumers sources of financing to purchase real estate. However, the two offer different terms and conditions as well as the pre-qualification processes. The loans are typically less expensive with banks but are more difficult to get approved, and it usually takes long before the funds are released to the borrower. On the other hand, private lenders offer more flexibility even though they are, in most cases, more expensive.
Most private lenders can customize the loan to suit the unique needs of the client. Banks are typically harder to deal with than private lenders since they are subject to certain regulations. These regulations often dictate the kind of borrower profiles the bank can deal with. On the other hand, private lenders are less regulated, and they can offer different types of loans to diverse customers regardless of their credit history. However, this is not to say that private lenders will ignore the borrower’s credit score completely. They still look at credit scores, loan to value ratio, and other metrics like debt-to-income ratio to determine the terms of the loan.
When working with a private mortgage lender, you can expect a more common-sense approach to lending. They take the time to understand your financial issues and, in many cases, overlook certain flaws that will quickly dismiss you when requesting a mortgage in a bank setting. Banks often use data that is computer-driven to approve loans, and they may end up denying a good borrower the opportunity to buy real estate.
Pros and cons of private mortgage lending
Private mortgage lending comes with an array of benefits. They include:
- It’s easy to qualify for a loan with less documentation. You may qualify for a private mortgage even if you don’t have a steady work history, a credit history, or other criteria that traditional lenders require.
- It allows borrowers to save money when the private mortgage lender offers a lower interest rate. This is often the case when the lender is a friend or a family member who is willing to provide the mortgage at a lower rate compared to what’s given in traditional financial institutions.
- For those with cash at hand and want to lend privately, this type of lending offers them an opportunity to earn more than what they’d get from bank deposits and savings accounts.
There are also some risks with this kind of mortgage lending that you should consider beforehand. They include:
- Can put a strain on meaningful relationships: If the private lender is a close friend or family member, the relationship may change if money gets tight and you’re unable to make payment. The lender may also find it difficult to enforce the payment schedule and risks losing their money.
- The lender’s circumstances may change: Some individuals offer a private mortgage only to realize later that it affects their ability to take care of their dependents, retire or take other critical financial steps. This may bring unforeseen challenges in the transaction.
- The property’s value may decrease: This is usually a risk for lenders since property values change over time depending on its condition and location.
- Tax implications: Lenders may have to pay more taxes because of this transaction. It is important to seek the help of a certified mortgage broker to advise on the existing tax laws.
Tips to properly structure your private mortgage
Private mortgage loans, like all other forms of financing, must be properly documented. Whether you’re getting the loan from a family member or a friend, putting everything in writing ensures that the expectations are clearly laid out to avoid unnecessary surprises. If you rely on your memory and mutual agreement without having everything in writing, years down the road, both parties may forget and disagree on what was discussed.
Some key highlights to look at when reviewing your private mortgage agreement are:
- The exact timings when payments are due
- Whether or not there’s a grace period
- How the payments are made
- What happens when the borrower prepays? Is there a penalty?
- Is there any collateral for the mortgage loan?
- What happens when the borrower misses payments? Are there additional fees charged by the lender? Will the borrower be reported to the credit bureau?
- Under what circumstances will the borrower face a foreclosure?
Spelling out all the details helps secure the interests of both parties involved in the transaction.
How to choose a private lender
Private mortgage lending often involves large sums of money which is why it’s important to work with qualified experts from start to finish. You need help finding a private lender who is willing to sign an arrangement that benefits both parties during the entire life of the loan.
Before you settle for a private lender, ensure that the private lender is willing to sign a written mortgage agreement that stipulates the terms and conditions of the loan. You may even opt for payments to be handled by someone else or even automated.
Whatever your unique needs are, you can get a certified mortgage broker to help you find a suitable lender that fits your current situation. The mortgage broker will help you determine the appropriate loan amount, LTV ratio, and even the ideal type of loan that you can qualify for. This professional will communicate with the lender on your behalf from the start of the transaction through closing.
Additionally, mortgage brokers often have access to a pool of private lenders and help you take the time to choose one that’s most suitable for your situation. It’s the broker’s job to make the mortgage application process hassle-free for you by liaising not only with the lender but also other legal parties. For more information on how a certified mortgage broker can help, you can click here to learn more.