If you are experiencing difficulty while qualifying for a conventional mortgage, you might be tempted to consider applying for a private mortgage. As previously mentioned, a private mortgage is a type of loan you can get from a third party lender when you have not been able to qualify with a traditional lender. Since private mortgages are given to borrowers who have bad credit, low income, untraditional income, self employed, or hard-to-prove income, these borrowers appear to be a more risky investment. As a result, lenders usually ask for higher interest rates, and private mortgage loans typically have additional fees. Despite these costs, many people benefit greatly from private mortgages.
Before you can decide whether a private mortgage is the right lending solution for you, it is important to understand the major advantages and disadvantages that can come with a private mortgage loan. Keep reading below to find out some of the pros and cons that can be associated with getting a private mortgage.
Private mortgages tend to be a much quicker form of financing than conventional mortgages. While getting a mortgage with a bank usually requires a much more time consuming and tedious approval process, getting approved for a private mortgage is a much quicker and less onerous process. Depending on the property in question, a borrower can be approved within hours and receive the funds in as little as a day or two if an emergency mortgage, last minute mortgage, or quick close mortgage is required.
When qualifying a borrower for a private mortgage loan, private mortgage lenders place much more emphasis on the property they are investing in rather than the borrower they are accepting. Since private mortgages come with higher interest rates and take into account the property and marketability of the property as their security, many private lenders are not concerned about whether their borrowers have low or unprovable income, or low credit scores. Homebuyers who have been rejected by the bank can easily apply for a private mortgage and get approved with much less hassle and in much less time. All in all, as long as you are able to pay your interest, you are typically considered to be the perfect candidate for a private lender. It is important to note that it is the job and responsibility of the Mortgage Agent and Mortgage Broker to satisfy the income criteria and ensure that they are not putting a client into a mortgage that they will not likely be able to afford.
Since the approval process for private mortgages is different, borrowers do not have to pass the stress test to get approved.
If you have debts or overdue bills that you are paying high interest rates for, then a private mortgage can help you consolidate all of your outstanding debt into one smaller and lower interest monthly payment using the available equity in your home. A debt consolidation home equity loan can help you get out of debt quicker and free up cash flow in the process.
A private lender will be able to finance the purchase of a home that requires maintenance, as well as finance the renovation costs themselves. Oftentimes it can be difficult to get a traditional lender or bank to agree to a mortgage on a fixer-upper that will require a lot of renovation and maintenance.
A private mortgage is perfect to use as a short term loan or bridge loan to keep you afloat until you procure your more permanent financing option. You can benefit from a private mortgage if you are purchasing a new home but haven't sold your old property yet, or if you are planning to execute a flip and need investment capital fast.
The biggest and most common downside to procuring a private mortgage is that the interest rates are much higher than traditional mortgages. Aside from the already high interest rates, brokers and lenders add their own fees on top of that sum, bringing the overall interest even higher. Although this could be discouraging, it's important to mention that private mortgages are mostly for borrowers that have no other options.
Private mortgage loans will usually come with additional fees such as lender fees, broker fees, and legal fees.
Conventional mortgages often have an amortization period of 25 or 30 years with terms typically ranging from 3 to 5 years. On the other hand, private mortgages require a short term interest-only loan and the borrower is usually expected to pay it back within the next 24 months. Although short term financing can be beneficial for many, it can also be stressful having to figure out other ways to replace your private mortgage when it comes due. A trusted mortgage broker will help you plan your exit strategy to pay back your mortgage in a year.
Most of the homebuyers looking to tap into a private mortgage have been denied a conventional mortgage from a bank or other institutional lender. They usually have no other readily available options. Thus, even though private mortgages are not the cheapest loan option available, they can be the best and only option available for many borrowers. If you are looking for a short term loan you can easily qualify for, then a private mortgage might be the perfect option for you.
At Clover Mortgage, we always recommend that you speak with a mortgage broker before you make the decision to get a private mortgage. It’s always best to have a professional broker look at your needs and properly advise you on the smartest way to proceed. Our mortgage brokers will be able to ensure that you fully understand the terms and conditions presented to you in your private mortgage, and help you decide whether this option is right for you based on your current financial needs and situation.