When the average person wants to buy a house, they call up a local banker or log on to a mortgage search engine tool and start comparing options. But not everyone has the time or prerequisites to qualify for a traditional mortgage. In these situations, private mortgage lenders can fill the void in the market.
Who Are Private Mortgage Lenders?
A private mortgage is a mortgage loan that’s created by a private individual and offered up to a borrower in order to purchase a piece of real estate. A private mortgage bypasses many of the hurdles and requirements that are typically present when working with a federally insured mortgage or traditional bank loan.
Private lenders come in all shapes and sizes. It could be someone close to the buyer – like a relative, friend, or business partner – or it could be an individual who specializes in private lending as a professional pursuit.
Private loans are generally offered for one of two reasons:
• As a favor to a friend or loved one who can’t qualify for another mortgage
• As an investment
Sometimes there’s a combination of these factors at play. But at the end of the day, it’s about filling a void that exists in the marketplace for people who want to purchase real estate but don’t meet the stringent requirements from a traditional lender.
The best way to find a private mortgage lender is to use a mortgage broker. These individuals have deep networks of lenders and can typically connect borrowers to the right people based on their unique circumstances.
The Benefits of Using a Private Mortgage Lender
Working with a private mortgage lender provides an array of benefits – many of which are invaluable in situations with mitigating circumstances. Here are a few of the advantages:
• Easier to quality. If you’ve ever been through the mortgage underwriting process, you know just how complicated and stressful the process is. You have paperwork, forms, credit checks, approvals, background checks…the whole nine yards. Not only is it a tedious process, but they make it hard to get approved. One of the major perks of private lending is that it’s much easier to qualify. The lender can qualify you on any basis they want. And if you have a good mortgage broker, they know which private lenders to put you in touch with based on your circumstances. (This further streamlines the process.)
• Faster funding. A streamlined qualification process ultimately means faster funding. In some cases, private money can be released in days (rather than the weeks or months it can take for a bank to get you money).
• More flexibility. Banks give out mortgages based on very specific criteria. Properties have to meet their checklist in order for them to release the funds and allow the property to close. Private lenders set their own terms, which gives you greater flexibility.
Who Works With Private Mortgage Lenders?
A private loan is kind of like a Swiss Army knife. It can be used by all different types of people in diverse applications. However, some common buyers who work with private mortgage lenders include:
• People with bad credit. When banks thumb their noses at bad credit scores, these individuals can often find opportunities with private mortgage lenders. This is probably the largest group of private mortgage loans.
• Younger homebuyers. A young homebuyer might have a healthy income, but lack a credit history. This person can turn to a private mortgage lender to get a loan offer.
• Time-crunched investors. Real estate investors don’t have the luxury of waiting for weeks or months to have a loan go through the due diligence/underwriting process. They often need funds in days. Private mortgage lenders can deliver.
• House flippers. Much like traditional real estate investors, house flippers need money fast. They also tend to have unique circumstances, which makes them a higher risk for banks. Private mortgage lenders to the rescue!
Making a Wise Decision
The wonderful thing about private mortgage lending is that it gives you options. If a traditional lender isn’t willing to make you an offer – or doesn’t have the terms you need – a private lender can step in and fill the void. The key is to evaluate all relevant factors and to make a decision that’s going to benefit you both today and in the long run.