Life’s circumstance can leave you with a poor credit rating. Divorce, illness or temporary loss of income can make paying debts difficult or even impossible.
The problem is that once you have a bad credit score, it can take a while to correct and it can influence your ability to access a mortgage for the purchase of a home.
Banks insist on a down payment of twenty percent of the mortgage, and many would-be investors find themselves in a position where they have saved the down payment but are still unable to get a loan due to a bad credit history.
Private Mortgage Lender’s Interest Rates
If you have been turned down by the prime mortgage lenders, rest assured that there are organisations that make it their business to offer mortgages to people with shaky credit records. There is of course a cost. Higher risk means higher costs to service your debt, so the bottom line is that you will pay more interest.
Interest is inversely correlated to risk, so you can reduce this expense by offering to make a larger down payment on the investment. To the investor this means that you have a bigger stake in the asset and therefore will work harder to ensure that the investment is paid off.
The major banks charge a rate 3.49% for mortgages, institutional lenders who service those with lower scores charge 5.49%, and private lenders who generally finance second mortgages charge between ten and fifteen percent.
Obtaining funding from private investors normally takes a lot less time than the time taken by the banks. Private lenders will often complete the process within a week or two, compared with the forty-five days that conventional banks take.
The Criteria for Granting the Private Mortgage
The criteria for granting the private mortgage is the value of your home rather than your personal credit rating or your ability to prove your average income. This is because the private mortgage lender secures the loan with your investment as collateral.
They will insist on a careful appraisal of the property that you wish to finance, and will require a rating of average to good before they will approve the mortgage. Private mortgage lenders will cap their loan at between seventy-five and eighty five percent of the value of the property, depending on the risk.
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Plan for the Longer Term
Private Mortgages are short term loans, extending over periods of six month to three years, so this is a short-term solution which must be accompanied by a longer-term plan. During the term of the loan you should work at improving your credit score or increasing the equity of your home, so that you qualify for a conventional loan at the end of the term. The banks will only refinance the home to a maximum of 85% of the value of your property.
Credit providers often use the Gross Debt Service Ratio to determine how much of your income will be used to service the debt, and will normally approve a ratio of as much as 35%, but you should feel comfortable that this ratio will fit your budget.
If you have been struggling to get a conventional mortgage, applying for a private mortgage may be the answer to your dilemma.