Private mortgage is the type of mortgage that is provided by another person or even a business rather than the traditional route of choosing a bank. At times, it might be the only option left after getting rejected from a bank already. However, some people prefer this over borrowing from a finance provider. Private mortgages not only fill the void of institutional lenders but they also offer clients a lot of flexibility in mortgage lending.
How Does Private Mortgage Lending Work?
While private mortgage loans and bank mortgage loans ultimately serve the same purpose of helping people become homeowners, there are several differences between the two types of financing: Private mortgage loans typically have much shorter terms than bank loans, and they also have higher interest rates. Private mortgages are useful for unique situations that institutional mortgage lenders aren't willing to lend in. When the bank says no, a private lender can step in to help to get the deal done. Whether purchasing a home or refinancing, a private lender can be useful when other options just aren't available. Often equity in the property is the easiest way to ensure you qualify for a private mortgage - even when income is difficult to prove and credit is poor.
Private lending isn't just for people with damaged credit or difficult-to-prove income - it's also useful when building a unique home or a home in an area that traditional lenders aren't willing to lend in.
Who Can Benefit from Private Mortgage Lending?
The alternative approval process of private mortgage lending means that these loans can be useful for people like self-employed individuals and small business owners. Someone who is recently self-employed, for example, may not have a long enough income record to obtain a bank loan, but may still be comfortable paying off a mortgage.
Other people who may be able to benefit from private lending include:
People wishing to rebuild their credit history
People in need of quick financing
People who need a short term loan
Borrowers who are purchasing unconventional properties
Home buyers or homeowners with self-employment income or other types of non-confirmable income
Buyers who want to self-build a home
Borrowers in need of interim (bridge) financing
People who want to use the equity in their home to refinance and consolidate debt
In some cases where credit, income, or the property do not fit well with conventional lenders, private lending can be a good option. Rates are higher than traditional lenders because the risk is higher to the lender. There are also fees to the broker as this is one of the few cases where the broker is not compensated for sourcing the business for the lender. Ideally, private mortgage financing is a short-term solution until we can move the client back into a conventional lender.
Despite these differences, there is one key premise that makes the deal worthwhile it must have a ‘win-win’ element for all parties. On the one side, you have a borrower that is getting the money to buy a house or whatever it might be used for. On the other hand, you have an individual or business taking a risk with their money. As long as there is a return in place for them, it becomes worthwhile and the risk remains low for both.