Private mortgages are loans offered by individuals or private lending companies to people who do not qualify for a regular or traditional mortgage loan. These types of loans are not much different from regular mortgages except that funds come from a private source, which can be individual investors or groups of investors.
Private mortgage lenders have a higher risk tolerance for their borrowers, so documents to prove credit history and financial background are not given much weight when evaluating a potential loan. Lenders look mainly at asset values to assess a borrower’s ability to pay, and they treat mortgages as an investment opportunity in which they collect interest along the way.
For this reason, private mortgages are advantageous to:
- Self-employed entrepreneurs – Although they may earn enough annually to finance a home those who are self-employed often cannot prove this to traditional lenders who require documentation to verify source of income and employment, and so they cannot borrow money. Private mortgage lenders have a higher risk tolerance than institutional banks and often target self-employed individuals who need financing to buy a home.
- Homebuyers with bad credit – A good credit score is a big factor with traditional lenders. They often consider a person with low credit score to be more of a credit risk, and tend to give them a loan with a higher interest rate or completely turn down their loan application. Private mortgage lenders have more flexibility to cater to higher risk clients who have credit issues such as bankruptcy or consumer proposal.
- High-risk properties – Private mortgages generally offer financing to borrowers who want to purchase a condo or a home that is in major disrepair, or raw land in the suburbs or a unique property, or those buying a “flip” property. These types of properties generally represent a bigger risk for traditional mortgage lenders, but private lenders can see certain types of property as potential investment opportunities.
- Those who need to consolidate debt using home equity – Traditional mortgagers usually turn down a second mortgage or refinancing using your home’s equity, but private mortgagers are more flexible to these higher-risk investments.
- Those who need bridge financing – A bridge loan is a short term loan taken out against a current property to finance the mortgage of a new property while waiting for the current property to sell. Traditional mortgagers very rarely approve these types of loans, but private mortgage lenders can provide bridge financing to help home buyers finance the new mortgage until they receive the cash from the sale of their old home.
- Those who need a loan quickly – Borrowers who need fast financing and don’t want to wait for a long approval process can get approved for a private mortgage loan in as little as 2 days and can have access to the funds in 2-3 weeks.
Interest Rates on a Private Mortgage
Privately funded mortgages can carry rates from 10-18% which can be influenced by many factors, such as the type of property, the borrower’s ability to pay, the competition between multiple lenders, the source of funding and current economic conditions. They are generally higher rates than what traditional mortgages charge but you have to factor in the fact that the loans are targeted to higher risk borrowers.
Fees Associated with Private Mortgages
Additional costs that you will have to shoulder may include the following:
- Legal Fees – Borrowers take on the cost for all legal services needed to draft and close the mortgage loan.
- Appraisal Fees – A private mortgage lender will require a property appraisal to know the value of the property to ensure that the loan amount does not go beyond this.
- Brokerage Fees – The borrower pays the broker’s fee directly.
- Property Inspection Fees – A house inspection will be required to ensure that the property you are buying is in good condition and will hold its value throughout the mortgage term.
A mortgage broker can help you through the ins-and-outs of private mortgages. Once he has assessed your financial situation to find out if private mortgages are right for you, he can then help you find the best loan structure for your financing needs and lead you to the right lender as he has connections to a wide variety of private lenders and investors.