Tight lending policies from commercial banking institutions have made obtaining residential and commercial loans difficult, which often leaves private mortgage loans as the only alternative. Private lenders get into the business to supply people with loans who have bad credit or too much debt, who need faster closing times, or who need the loan structured creatively. They make their money by charging higher interest rates for these privileges, and maintain short loan terms of six to thirty six months.
A private mortgage company assumes the same risk of a commercial lender; however, they act faster and are looser on their applicant requirements. Taking a risk with clients with poor credit, bankruptcies, or lingering bad debt necessitates making calculated risks. To compensate, a private loan charges higher interest, and requires a lower loan-to-value ratio (LTV.) Where a commercial bank will be comfortable with a ratio of 90/10, a private loan will go no lower than 70/30.
Based on these numbers, an individual looking for a non-traditional loan will need to come up with a down payment of 30 percent or more of the appraised property value, or obtain the real estate at a significant discount. If the loan terms are not a problem, it is time to start shopping for the best rate.
Rates on private mortgages will be as much as double the current bank rate. However, just like other lucrative fields, lenders need to compete for business, so comparing companies is still prudent. Even with a competitive rate, potential mortgagors need to fully consider the increase in their monthly payments and overall home cost. To people with no other options besides renting, the temporary living cost increase is worth the struggle.
Like a hard money loan, these short-term mortgages should only be considered as a way to get possession of a property. Mortgagors can leverage the time during the loan to clear bad debts and establish a steady payment history. If this is done, the home can be re-financed with a friendlier mortgage at the end of the private money terms.
Private mortgages help individuals who cannot qualify for a traditional loan to buy residential properties, but they are just as effective for commercial property. Without the same institutional requirements, including the need for approval from several departments, a private lender can close within one to two weeks. This speed is beneficial to real estate investors who need to act quickly when an opportunity presents itself.
Another advantage to a non-traditional commercial loan is how it can be structured in different ways to make a deal go through. There are many possibilities, including creating balloon payments with a lower down payment, or setting up a wrap around mortgage. The goal is to make a deal both parties can live with.
How can a small company take on risky borrowers and make a loan go through quickly when a large bank cannot? Institutions have several steps to approval, and a chain of people it must go through on the way there. Every applicant will have his or her background and credit history scrutinized as well. Conversely, a private mortgagee is not as concerned about the individual’s borrowing history, so long as their income is sufficient to make the payment on the loan. The decision is focused around the value of the property, and can be made within 48 hours of receiving the request.
The high costs associated with private mortgage loans have given these businesses a negative reputation, and an individual should do their due diligence before committing to such a loan. However, federal usury laws protect the public from being charged interest indiscriminately. The bottom line is this: Whether the individual is looking for a loan or an investment, be aware and prepared for the potential costs.
Financing