Home Home Loans What are Private Mortgage Loans?

What are Private Mortgage Loans?

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In recent years, many would-be homebuyers ran into difficulties getting approval for mortgages. After the mortgage market crash, many lenders tightened their standards, and government regulations and requirements for lenders have also tightened. As a result, it can be sometimes difficult to qualify for a more “traditional” mortgage at a bank — especially if you want to buy a property for investment.

The good news is that you don’t always have to rely on a bank. Private mortgage loans are available for some homebuyers looking for a little help, when the bank won’t provide the financial backing.

Private Mortgage Loans

Just as you would expect, private mortgage loans are offered by private parties, rather than banks. So, with this type of loan, you get your money from another person, or a group of people who pool their money to make large loans to others. You can usually find a private mortgage loan from a wealthy individual looking to diversify investments, or by searching for a local real estate investment club.

It’s often easier to qualify for private mortgage loans because the focus is on the property and its value. Private investors (and groups of investors) hope that you’ll repay the loan with interest, but if you don’t, the property reverts to the lender — just as it would with a bank loan. Many private investors and real estate investment clubs are more interested in the value of the property than your credit situation because if you default, they can make something of the property and come out ahead.

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On the other hand, private mortgage loans often have shorter repayment periods and you will pay a much higher interest rate. You might have to repay the loan within five years, and it’s common to pay interest rates above 10 percent. However, if you can’t qualify for a bank loan, a private loan can be an option.

For the most part, private mortgage loans are ideal for those who are looking to use a property for investment. While it’s possible to get seller financing on a residential home for 15 to 30 years, private investors and investment clubs aren’t going to want to take that risk or wait that long for their money. Many of those looking for private mortgage loans do so in order to buy a fixer-upper that they can then flip for higher profits. The lenders get their return, and the buyer sees a profit.

As with any loan, it’s important that you do your homework before signing any paperwork. You need to understand the terms, and realize what you are getting into before you get involved.

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