What is a Private Lender and Why Might I Need One?
In this article, we’re going to look at private lenders and why you might need one.
What is a Private Lender?
A private mortgage lender is a corporation or individual lending out their money for mortgage lending purposes. A private lender is most often not associated with traditional financial institutions that loan out mortgage funds, such as banks and credit unions. Instead, a private lender could be a Mortgage Investment Corporation (MIC), whose money from investors is loaned out, or it could even be a family member or friend.
Since private lenders don’t balance sheet lenders and don’t accept deposits from the public, they aren’t regulated by the government. Therefore, they can be a lot more flexible when it comes to their underwriting guidelines (more on that later).
Private lenders also charge lending fees. This depends on the individual private lender. Depending on the length of time you anticipate needing the private mortgage, you might opt for a higher interest rate and a lower fee if you anticipate being able to pay it off relatively quickly.
What is a Private Mortgage?
Private mortgage almost always comes at higher interest rates than traditional mortgages from prime lenders unless it’s a family member or friend loaning you the money. As such, private mortgages are almost always for shorter mortgage terms.
For a traditional mortgage, five-year mortgage terms are most popular. However, when it comes to private mortgages, the mortgage term is rarely that long. Your mortgage term might only be one year or less.
While traditional mortgages tend to be closed term, private mortgages tend to be open term. That means you can pay off a private mortgage at any time without incurring a costly mortgage penalty.
Private mortgages work just like traditional mortgages. The private lender provides you with the funding you need to purchase or refinance the property. You’ll then pay off the mortgage based on an agreed-upon repayment schedule.
With traditional mortgages, you’ll almost always make principal and interest payments. However, with private lenders, you may be allowed to make interest-only payments. While not a good long-term strategy, this can undoubtedly help you short-term if you’re having cash flow issues. It’s a lot better than losing your home.
Unlike traditional lenders who price their mortgage based on the market and the cost of their source of funds, private lenders prices their mortgages based on an anticipated return on investment. That’s why private mortgage rates tended to remain high over the last couple of years, despite record-low mortgage rates from traditional and alternative lenders.
Why Might I Need a Private Lender?
Private lenders make the most sense when you’re unable to secure financing from a traditional lender. Maybe you’re newly self-employed, or you recently filed for bankruptcy. Whatever the reason, private lenders tend to be a lot more flexible than traditional lenders.
You’ll want to do a good job of telling your story when signing for private lending. The private lender will want to know why you need a private mortgage and your exit strategy. That’s why you want to work with an experienced mortgage professional that can do a good job of telling your story, so you can successfully get the financing you need.
The Bottom Line
Are you interested in looking into private mortgage lending options? Reach out to our mortgage experts today for a helping hand.