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What is a Private Mortgage Lender?
A private individual or a small company that makes specialized real estate loans for particular classes of property is referred to as a private mortgage lender. A private lender usually works with borrowers who have problems obtaining mortgage loans through conventional channels. Private loans are typically short-term or bridge loans for an amount that are mainly secured by using the property as collateral. This specialized niche in the mortgage lending industry has grown in recent years, due to the turmoil in the financial markets and the difficulty of obtaining conventional loans. Bridgepoint Funding
Interest Rates for Private Loans
Private mortgage loans are offered at higher interest rates as compared to banks, because of the additional risk involved with these loans. Even though private loans come with higher interest rates, many high-risk borrowers prefer them because of the difficulties involved in securing conventional loans. The risk to the lender in these deals is offset by higher equity requirements for securing the loan, typically at least 30%. Private money borrowers are not limited to individuals; higher-risk companies also work with private lenders because the requirements and guidelines for conventional loans have become increasingly strict.
Uses for Private Money Loans
A borrower can use the private money loan for many different purposes. He or she might refinance an existing mortgage, purchase more property, or construct improvements on commercial land. The loans can also be used to reduce the negative impact of a borrower’s foreclosure or bankruptcy proceedings. The loan can also improve chances of qualifying for other loans to purchase additional parcels of land.
Features of Private Mortgage Deals
A private mortgage deal is based primarily on the lender’s analysis of the hard assets of the borrower — primarily the underlying property used as collateral. These transactions involve features such as partial property deed releases, borrower participation, and interest-only loan repayments. They are usually accomplished with a much quicker turnaround time than a commercial mortgage. Private mortgage money is available for both primary mortgages and second mortgages, although the second mortgage interest rates will be considerably higher.
The Importance of an Exit Strategy
Another feature important to a private mortgage lender is the borrower’s exit strategy. The borrower should have a detailed and well-thought-out plan in place to repay the entire amount of the loan in one year or less. Sometimes this means sale or refinance of the whole property, or sometimes just a part of the property. Private mortgage loans are very important sources of money for borrowers facing dire circumstances or struggling with poor credit profiles.