All About Private Lending
If a commercial or residential mortgage is not for you, a private mortgage is also an option. A private mortgage is between the borrower and lender for the borrower to buy a house. Although private lending has a bad reputation, it is a good option for people who don't qualify for a traditional mortgage.
Private mortgages have different criteria for borrowers to meet compared to traditional mortgages. This also means that private mortgage loans are higher than traditional ones due to the higher risk to lenders. A typical interest rate for traditional mortgage lenders is below 5%, whereas a private mortgage rate may go up as high as 20% or higher.
This is because private mortgage lending is an unregulated industry; anyone who can lend money and put their name on a deed can be considered a private lender. Rates also vary depending on whether it's your first or second mortgage.
The good thing about private lenders is that they are more focused on the value of a property than only looking at a borrower's credit and income. So, despite the higher interest rates, private lending may be the only option for some borrowers.
This may include self-employed people. Self-employed people typically have an irregular or unsteady income that makes traditional lenders wary of offering them a loan.
A private loan may also be good for people who either don't have any credit or have a bad credit score. Traditional lenders will typically not rent to those with a bad credit score as the risk that they will not be able to pay the loan back. Private lenders are willing to take the risk by charging a higher interest rate.
Filing for bankruptcy is typically the last resort for people with debt to pay back that they cannot. Bankruptcy leaves a big stain on your financial record, especially when applying for a mortgage. Traditional lenders are likely to not lend to those with a bankruptcy on their record, but a private lender will.
A benefit of private loans is that they are more lenient. Borrowers and lenders can come to their agreements about when payments need to be met and what the monthly payment should be. Some private lenders will let you forego monthly payments and instead pay at the end of the term, and this is called an accrued interest private mortgage.
Many borrowers are concerned about taking private loans as lenders do not need to be licensed and may take advantage of a borrower's needs. Highline Mortgage, however, works with reputable private lenders to ensure that your needs are met, and the private loan is beneficial to both parties.
It is important to note that a private loan should be treated as a short term, not a long term solution. It is a stepping stone to building up or rebuilding your credit to be eligible for a traditional loan with a lower interest rate. Private lending should only be considered when all other options have been exhausted, as it will cost you more in the long run. Aim to use a private loan for around six months to three years, no longer.
There are three common types of private lenders: individual lenders, syndicate investors, and mortgage investment corporations. Anyone can be a private lender as it is a person who invests their own money to a borrower. A syndicate investor is a group of investors who use their funds, but they compile them into one borrower's mortgage. Lastly, a mortgage investment corporation is another group of investors, but they use their personal funds available to several mortgages. The bottom line is that private lenders use their own money to lend to borrowers.
Another important thing to note is that although mortgage brokers typically get paid through a commission from the lender, this is not the case for private loans. Private lenders do not pay a percentage to the mortgage broker, so that fee will come to the consumer, typically out of the loan.
The fee varies depending on the size of the loan and the complexity of it. Despite the fee, it is extremely beneficial to use a mortgage broker for private loans. This is because we work with multiple private lenders and are familiar with the language they use. We know how to find a mortgage product that will suit your needs and ensure you get a deal that will benefit both parties.
Like with any mortgage, it is possible to apply on your own. But, again, it is always better to use a mortgage broker like Highline Mortgage. We are committed to getting the best deal possible for our borrowers and will ensure that you are happy with the outcome.