You just never know when or why you might need a lot of money for something other than a straightforward mortgage for a home to live in. Perhaps you need money quickly for a very specific purpose that will never satisfy the requirements for a traditional mortgage. Quite often, people use a private mortgage for purposes like:
Sometimes, a traditional mortgage from a conventional lender is simply not possible. Perhaps your credit score is too low, or the business you want to start or expand isn’t yet well-established. You probably won’t be able to get a conventional mortgage, but you may be able to get a private mortgage, because the approval process is quicker and easier. A private lender will tend to look more closely at a property’s overall value and marketability than at the borrower’s credit score and debt.
Private mortgages tend to be short-term loans, usually 1-3 three years, during which time you will only have to pay interest, not the principal. Private lenders are investors who want a quick return on their investment and they offer private mortgages because they found a market they can make money from; they realize that the conservative lending guidelines used by conventional mortgage lenders lock out a lot of people who are fully capable of paying back the loan.
Even though the rate for a private mortgage is usually significantly higher than a traditional mortgage, they are easier to qualify for and faster to get than a conventional mortgage. The approval process makes them perfect for those with less-than-perfect credit history, or even for a small business or the self-employed, who often have income that isn’t easily verifiable.
Private mortgage lenders are investors who are in business to make money, but they are ready and willing to take on more risk than a mainstream lender, which is why their rates and fees are higher, currently between 10% and 18%, although the rate will depend on the amount borrowed, the value of the property, the current economic conditions in the region where you are and the rate of return they want on their investment. If the market is hot, investors will want to make more on their money.
When it comes to fees, whereas a conventional lender pays the broker's commission directly, for a private mortgage, the borrower will pay the broker’s fee. In addition to the commission, there are usually set-up fees for private loans, usually 1-3%, although they can be incorporated into the private mortgage, so they won't hurt quite as much. For example, if you borrow $200,000 and the fees are 3%, you can just borrow $206,000.
Private mortgage lenders tend to specialize in one type of loan because they want to become expert in one or two categories. By specializing, they can generate more business and it allows them to better assess risk. What that means to you is, while some will only write private mortgages for residential property, others will only write commercial property mortgages and still others will only lend you money for home renovation or rehabilitation. Also, many private mortgage lenders are only comfortable lending in the community where they have an office, although it never hurts to ask, since this isn’t a rule.
There are many advantages to a private mortgage, and here are some of the most popular:
• Approval tends to be easier, with fewer strict guidelines;
• Approval tends to be faster than with a conventional mortgage, sometimes only taking a few days;
• Terms tend to be short, since the lender wants to move the loan to a conventional lender rather quickly;
• The lender will help the borrower move the mortgage to a conventional lender, which lowers the interest rate.
There are a few disadvantages to a private mortgage, as well:
• Because private lenders specialize, it can be difficult to find one who will work with your particular circumstances.
• Down payments for property purchased with a private mortgage will require at least 15% or more as a down payment.
• If you already have a conventional mortgage with a prime lender, it will be difficult to get a private mortgage, regardless of the reason.
The private mortgage landscape can be tricky, which means an experienced and knowledgeable mortgage broker can be an invaluable help when it comes to getting you the right private mortgage lender and a mortgage with the best terms possible. The difference between traditional lenders and private mortgage lenders makes having a broker to work with extremely important; it can save you thousands of dollars. The best mortgage brokers have access to a great many private lenders who can get you the money you need for the purpose you have in mind and we can get you a rate and terms favorable to you.