Most borrowers, especially players in the real estate industry think of private financiers as a last resort if they can’t get financing anywhere else.
However, private lending has become a popular financing option due to strict mortgage procedures set by the federal government and the excessive caution being exercised by traditional institutional lenders.
What is a private mortgage loan?
Private mortgage loans are short-term, interest-only type of financing, ranging in length from one to three years. Normally, these kinds of mortgages do not require a borrower to pay the mortgage principal down; but alternatively, only require interest payments every month.
Private lenders have become conscious of the fact that conservative lending rules used by conventional lenders and banks exclude many potential homeowners who are actually able to pay back loans. Bear in mind, private mortgage lenders mostly take into consideration a property’s overall value and salability as opposed to merely the borrower’s credit history.
Typical circumstances where individuals may need private mortgage financing
Private mortgage lending can be a brilliant option for the following individuals:
- Self-Employed individuals that declare little or no income
- Individuals wishing to buy unconventional property which a traditional lender may not be willing to finance. For instance, some banks usually don’t finance cottages or micro-condos that are very less in terms of dimensions
- Foreign investors
- Credit challenged individuals
- Individuals with property taxes that are in arrears
- Homeowners going through a foreclosure
- Individuals who don’t wish to refinance their first bank mortgage since the penalties are too severe
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Benefits of private mortgage arrangement
If you are a borrower in the mortgage industry, then you are guaranteed to enjoy several benefits from this kind of arrangement. First and foremost, private lenders do not solely insist on good credit history. Securing financing from a bank especially if you have a bad credit score can be quite tricky. Private financiers, in contrast, are more concerned with your property’s appraised value and do not base their analysis on your credit history or income. This means meeting the requirements for a private mortgage loan is quite easy.
Secondly, private funding is great for flippers and “fixer-upper” properties. Properties which need extensive renovations are usually not eligible for conventional mortgages. However, a private lender in such a situation is better positioned to provide financing to get the property in a sellable condition.
Thirdly, private mortgage lending has a short approval process. The approval process normally takes a few days, as opposed to weeks or months which conventional mortgage lenders take to process your request.
Lastly but not the least, some borrowers may not be comfortable divulging their personal financial information, which is a must requirement when applying for a loan from conventional lenders. Alternatively, not disclosing this info would have little or no consequences when obtaining a private mortgage loan from private lenders.
Tips for getting a Private Mortgage
With limited credit available from traditional financiers and more risk-averse business practices being encouraged when it comes to real estate; it’s becoming more and more important for people to appreciate the role of private mortgage lenders. Private lending institutions remain imperative since they serve niche markets such as construction financing and second mortgages, not to mention individuals locked out of the market following the departure of subprime lenders.