If you’re planning to invest in real estate, you have several avenues open to you, all of which can be the right choice depending on your specific needs. Many investors choose to go the tried and true route of partnering with a bank, especially if they are intending to buy the property and hold it for a long time; others who have already built up a sizable real estate portfolio may finance the purchase on their own.
What if you don’t have the cash to purchase a property upfront, and you intend to hold it for a shorter time frame than the life of a typical mortgage? If you want to flip a house, you don’t want to be locked into a 15-year mortgage, especially if you can’t find a lender without prepayment penalties. In this circ*mstance, private mortgage lenders are your best option for getting the financing necessary to buy the property. Let’s take a look at what these institutions are, the pros and cons of using them to get a loan, and the factors you should consider when pursuing this avenue.
A private lender is one that is not affiliated with a bank or credit union
“Private,” in this instance, simply means that the lender operates outside of a banking institution; they can be publicly traded companies, or they may be genuinely private.
There are several differences between a private lender and a bank that you must understand before you begin your lender search. Firstly, they generally specialize in hard money loans: these have a shorter term than a traditional mortgage, making them well suited for house flipping.
The next difference is that they typically determine their lending rates not on your qualifications as a borrower, but on the collateral being used – in other words, on the property itself. This means that they will take a good look at the current property value of your investment, as well as its potential income, in order to figure out the terms of the loan.
If this sounds good so far, let’s consider some of the benefits and drawbacks of using a private lender.
Private mortgage lenders can provide faster and more flexible lending, but it comes at the cost of higher interest rates
If you’re not sure if you can qualify for a conventional mortgage due to your credit score or income streams, or you don’t want to hold a property for more than a few years, then a private lender may be your best bet, as they focus on shorter-term loans. Banks are incredibly risk averse, and they have very stringent requirements for their loans, so those who have less-than-perfect credit or who are self-employed may have a very difficult time getting a loan from them. In contrast, private mortgage lenders are more willing to negotiate the terms of their loans, including the length of the loan.
Another benefit is that they can approve the loan faster because they are not bound to the same regulations as banks. The banking industry is tightly structured, which means that any loan must go through a phalanx of tests; however, private mortgage lenders don’t have these, so they have far more autonomy when it comes to approving you.
However, there is one downside to private mortgage lenders, one which they are very open about: they charge higher interest rates and have more fees than a bank would because they are taking a greater risk on you. Additionally, there are fewer protections for the borrower should something happen to the institution; this is why it’s essential that you work with a well-established and reputable private mortgage lender when seeking this time of the loan.
When choosing between a private lender and banking institution, consider your goals and current financial status
It’s essential that you carefully research each possible lender and that you consider how their products match your needs. Every institution has different loans, which are meant for certain circ*mstances; if your plans don’t match the product, then you need to find one that better reflects what you’ll be doing with the property.
Those who will be selling a property quickly will likely do best with a private mortgage lender, as they won’t be locked into a loan for the long term; however, if you’re going to buy and hold, you would be better off working with a bank who can provide you assistance over the lifetime of the loan.
Your credit score will also play a role in how you decide. If you’re flipping but have a subpar credit score, you might only qualify for very high-interest mortgages that you’ll be paying off for many years, in which case a private mortgage is a better option. However, if you have an excellent credit score and a sizable stock of cash, you may be better off getting a 15-year mortgage and just paying it off ahead of schedule when you decide to flip the house, as you’ll benefit from lower interest rates and fees.
As with all investment decisions, there are numerous factors involved that you need to investigate carefully; you might benefit from talking to a financial advisor, who can assist you in choosing the right servicer for your own situation. Regardless, you have numerous options available, each of which could be the perfect chance to become a real estate investor.
FAQs
Private mortgages are often provided by a family member, friend or other person with a personal relationship to the borrower. Typically, a private mortgage lender creates their own guidelines and terms of the loans, which can make it easier to qualify for the loan.
What is a private lender mortgage? ›
A private mortgage is a loan that's provided by an individual or company, rather than a financial institution. "Homebuyers usually consider a private mortgage when they're unable to qualify for a mortgage from a traditional lender," says Leslie H.
How would you determine which lender to use? ›
How to find the best mortgage lender
- Step 1: Strengthen your credit score. ...
- Step 2: Determine your budget. ...
- Step 3: Know your mortgage options. ...
- Step 4: Compare rates and terms from multiple lenders. ...
- Step 5: Get preapproved for a mortgage. ...
- Step 6: Read the fine print on your loan estimate.
Private money lending occurs when a wealthy individual or private organization loans money to a person or company. Private money lending is common in real estate investment. Private money lenders loan money to investors who purchase and, often, renovate properties for resale or rental.
What are some ways to determine whether you can afford a loan? ›
Your income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.
Why choose a private lender? ›
Private individual lenders are generally more willing to work with people with a lower credit score or more difficult lending situation. They do this in exchange for a higher interest rate and they have a higher rate of acceptance on the loan as well.
What are the risks to private lenders? ›
The main risk associated with private lending is the risk of borrower's default (i.e. inability to make their scheduled mortgage payments).
When to select a mortgage lender? ›
You should have your first conversation with a mortgage lender six months before you plan to buy a house.
What are the 3 C's lenders consider when deciding whom to give credit to? ›
The three C's are Character, Capacity and Collateral, and today they remain a widely accepted framework for evaluating creditworthiness, used globally by banks, credit unions and lenders of all types. The way each of these components is evaluated varies between countries and lenders.
Where is the best place to get a mortgage? ›
Best Mortgage Lenders of 2024
- Rocket Mortgage: Best Mortgage Lender for Flexible Terms.
- New American Funding: Best Mortgage Lender for Low Minimum Credit Scores.
- PNC Bank: Best Mortgage Lender for Medical Professionals.
- Mr. ...
- Truist: Best Mortgage Lender for Applying Online.
- Ally: Best Mortgage Lender for Fast Preapproval.
Banks are traditionally less expensive, but they are harder to work with and more difficult to get a loan approved with. Private lenders tend to be more flexible and responsive, but they are also more expensive.
Is it good to use private lenders? ›
Typically, a private mortgage lender creates their own guidelines and terms of the loans, which can make it easier to qualify for the loan. This can be a good option for someone who may not qualify for a traditional mortgage or a buyer who wishes to flip a house.
How long does it take to get money from a private loan? ›
Private student loans can be approved in as little as a few hours to two weeks. Typically it will take around 1-2 weeks to receive the funds after approval, though it may be longer depending on the lender and the type of loan you choose.
What are the 5 Cs of lending? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are the 4 Cs of lending? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa.
What are the four Cs of loans? ›
The 4 Cs of Credit helps in making the evaluation of credit risk systematic. They provide a framework within which the information could be gathered, segregated and analyzed. It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions.
Is it better to go with a private mortgage lender? ›
The loan process for a private loan is often faster, with no income verification, and the terms are more flexible, allowing borrowers to seize timely investment opportunities. However, these advantages come with a cost — private loans usually carry higher interest rates than bank mortgages.
Are private mortgages a good idea? ›
A private mortgage could be an option for borrowers who have a hard time qualifying for a loan based on their financial situation, credit history or type of home they wish to purchase. However, the loan can be riskier and can be damaging to finances — and personal relationships.
Is a private mortgage lender better than a bank? ›
Bank lenders typically offer better rates and the added security of working with a well-established lender, but loans from private online lenders are often quicker and easier to get. The best option for you depends on your specific circ*mstances.
What is the difference between a mortgage and a private loan? ›
A personal loan is usually unsecured (i.e., without the need to provide collateral). Mortgages are usually used to purchase real estate and are secured by the property bought with the loan. Personal loans can usually be funded faster than mortgages, but they might have higher interest rates.
