Private mortgage lenders are often overlooked by investors looking to finance their next real estate purchase – but there are real advantages in using them. The difference between regular mortgage financiers and private mortgage lenders is that the former is made up of banks or other general financial institution, whereas the latter provides specialist lending services, generally to real estate investors. Private lenders often provide the flexibility that real estate investors need in structuring their loans – allowing more flexibility for investors who have access to funds through private mortgage lending.
There are a number of key differences when you look at a private mortgage lender compared to a regular lender – some are positive and some negative, but they are incredibly handy to know about. That is because there are some instances where a regular mortgage lender just will not provide finance – but a private mortgage lender will. Depending on your lender mortgage insurance may also be a necessary consideration, but this is totally dependent on who your loan is with. Let’s take a closer look at how it all works.
Speed of closing
I know that when real estate investors decide to purchase a property, they will generally want the deal to close immediately, or for it to take a longer time – sometimes a year or more. The key to a quick close is having your finance set up quickly to close the deal and have contracts exchanged. That is where private mortgage lenders really come in handy.
Unlike traditional money lenders, a private firm will be able to complete a transaction within about a week. This compares to the 2 to 3 month wait for conventional mortgage providers. That is because they have so much less to do before they issue the funds. For some of the reasons for this, read on below regarding the qualification process. The speed also translates to the approval process, which is generally within 24hrs. A traditional lender such as a bank may claim to have approvals back within 24hrs, but they are usually conditional, and not final.
Issues around qualifying
The key difference between private mortgage lenders and other sources of finance is the qualification process. Traditional mortgage providers concern themselves with your credit history, your debt level, tax returns and financial statements and much more. All this information takes time to compile and ensure is up to date, then they need to be checked and decided upon. All of which contributes to delays you just do not want.
In contrast, a private mortgage lender is not concerned with those details, they are concerned with the appraised value of the property – that is the main criteria for loan approval. In addition to the property, another consideration is the income that the property produces – these two elements provide the security for the loan. The value of the loan will generally be no more than 70% of the appraised value of the property, and you will receive less of a percentage if the property produces no income – say a block of land.
Terms of the loan
A loan with a private mortgage lender will have very different terms that you will be used to from your experiences with regular lending institutions. Remember that these loans are geared towards professional real estate investors. They are generally for short periods of time, usually no more than two or three years and have a higher interest rate. The rate is usually around 5% higher than the prime rate, and is thus considerably higher than conventional loans.
Despite these sometimes seemingly onerous terms, a loan with a private mortgage lender can really help you advance your interests in real estate. It is all well and good to have a loan with a conventional lender ready and set to go – and that is advisable, but not always possible. There are good reasons to go with one of the many private mortgage companies. These include privacy, where it is important to keep your financials under wraps, and speed – where you want to close a deal ASAP.
Either way, private mortgage lenders are a fantastic resource for professional investors to obtain the finance they need to conduct their business. These private mortgage loans offer great flexibility and opportunity to investors – and not just private mortgage investors either. The traditional view with mortgages is that the lender is the one who profits from the arrangement – but real estate investors who take out private mortgage finance also stand to profit from finding quick solutions to their need to access funds at short notice.
So, next time you are shopping for finance options for your next investment purchase, look at private lenders for mortgages. Or on the other hand you could consider using a private mortgage broker to help narow your search a little.