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What Are Private Mortgage Loans?
Private mortgage loans are granted by private lenders unlike banks or conventional financial institutions. These short term loans do not require homeowners to pay the mortgage principal. Simply put, you only have to make the interest payments each month. Because private mortgage loans are short-term, their time period can range from 1 to 3 years.
What do private Lenders take into account? Well in most cases, a private lender would consider the overall value of your property and how marketable it is. They are less likely to have a look at your credit history.
How do Private Loans Differ from Conventional Mortgage Loans?
Most homeowners consider private mortgage loans as an option if they cannot find secure financing from any other source. Private lenders get their money through other individual investors or MIC i.e. Mortgage Investment Corporation. In both cases, a private mortgage is treated as a short term investment.
There is a slight difference in the application process as well. Unlike bank mortgages which scrutinize your credit history and financial situation, the private lender is interested in your property. This simply means that if a default occurs, the lender would fall back on your property.
It’s not surprising that properties in rural areas or less popular towns do not qualify for a higher loan amount. The private lender only pays attention to the condition of your property, its location and most importantly, how easy it will be to sell the property if you get into trouble.
Should I Consider a Private Mortgage Lender?
You can use a private mortgage loan instead of a conventional loan if:
- You want to buy an unconventional property that normally wouldn’t get financed by a bank or a financial institution.
- You need a quick loan and you cannot wait for the long approval process
- You have a bad credit history and the chances of your loan getting approved by conventional lenders are rare
- You only require a short term mortgage
- Your personal income is unpredictable and it would be difficult for you to find a conventional mortgage
Private Mortgage Loans – What Can You Expect?
The interest rate offered by private lenders depends on their source of funding. If your lender is funded by MIC, they would definitely charge you more to ensure a healthy rate of return for their investors.
Presently mortgage interest rates are decided after evaluating your property, your financial conditions and of course, the prevailing economic conditions. Since most people turn to private lenders when they need quick loans or they cannot qualify for a traditional loan, you can expect to pay a higher interest rate for private loans.
For example, if conventional mortgage loans have an interest rate of 10 to 18%, you can expect private mortgage lender to charge you slightly more than this rate.
- You also need to remember that private mortgage loans come with a setup fee and this can range from 1 to 3% of the total loan amount.
- For example, if you borrowed $100,000 from a private lender, you can expect to pay $3,000 as setup fee.
What are the Uses of Private Mortgage Loans?
You can use a private mortgage to buy a new property.
Another popular use of private mortgage loan is for the second mortgage. You can use private loans as the second mortgage to support your conventional mortgage. Many people find this useful as most banks are hesitant to offer second mortgages.
A number of real estate investors are also turning toward private lenders for a variety of reasons. Some real estate investors use private mortgage for short term financing. This is especially true if they’re the ‘fix’ and ‘flip’ kind of investors.
Private mortgages are the best possible option if you want to buy a distressed property, such as homes that are due for foreclosure. Because conventional companies prefer not to touch distressed properties or finance them, a private lender can be your best bet. You can use private funds to buy the property and fix it. Once you feel that the property can generate excellent cash flow, you can put it up in the market and make more money.
Another use of private mortgage loan is to make the necessary aesthetic repairs and make your property more desirable. For example, if you are thinking about renting your home, you can make some timely repairs and even complete renovations to make your home more aesthetically pleasing. Needless to say, it becomes really easy to charge higher rents when your property is in excellent condition.
Sometimes homeowners are turned away by banks because they have too many homes in their portfolio. If you feel that the bank won’t approve your loan or your application will get rejected, you can turn to private lenders and get the desired amount of money.
What Should You Consider Before Applying for Private Mortgage Loans
Even though private mortgage loans can help you get out of sticky situation, they are still a short-term fix. That’s right. You can consider getting a private loan as a temporary relief until your traditional loan application gets approved.
As stated earlier, private loans do have an additional cost associated with them. You need to remember that private lenders can charge you a higher interest rate. The interest rate you are required to pay depends on the condition of your property, its location and the amount of loan that is needed. It is seen that most private lenders charge 12 to 15% interest.
In addition to the interest, you are also required to pay a small setup fee to the lender which can be 1 to 3% of the loan amount. Another important thing to remember is that this fee can go up to 5% if the loan amount is less than 50,000 dollars. Other costs that can be applied include:
- Mortgage broker fee
- Legal fee
There can be additional charges for backing out of the private mortgage early. Make sure you ask your lender to know more about the associated costs before taking a private loan.
In 2017, a new Canadian mortgage law specified that every Canadian who was applying for an unsecured mortgage at a federally regulated financial institution had to pass a mortgage stress test. Even a hefty down payment was not a sufficient reason for waiving the test....