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For most borrowers, the problem is no longer the low mortgage rates; it’s the strict lending requirements imposed by lending companies. This has resulted in most borrowers considering private lenders as an alternative.
Also known as "hard money," private money funds often come from private lending companies or private lending individuals willing to extend loans to home buyers to purchase specific property. You can find private lenders by joining a real estate investment club in your area. However, as borrowers have discovered, borrowing from private lenders has its own pros and cons.
Easy to qualify
As you would expect, if borrowers are running away from banks and other lending institutions because of overly strict lending requirements, then accessing loans from private lenders must be a little easier. Indeed, this is the case.
Borrowers with less-than-perfect credit scores, debt, or self employed individuals who would often struggle to qualify for a traditional mortgage can easily get private funds. As long as the project shows promise of profit, your current credit score matters little.
It’s a great option for flippers
As you will discover shortly, one of the shortcomings of private mortgage loans is short payback periods. However, does that even mean anything if you plan on selling the home in the next three months? No. For flippers, people who get into the business to buy and sell, a 12 month window is enough to get a buyer and settle the loan.
It’s an option geared towards upper-fixer properties
Homes that need extensive renovations hardly qualify for conventional mortgages. Even with the best credit card score, you are likely to be turned away. The main reason for this is that lenders are very cautious with the value of the property. How much is it likely to sell for when the renovations are finally completed? If they don’t see you making a good profit, they might as well just stay away.
A good example is a house that has remained vacant for a significant period of time and is currently unsellable probably because it is vandalized or the plumbing is in a bad condition. While repairing the plumbing might make the home more attractive, it’s unlikely to increase the value of the house and even it does, it won’t be by a big margin.
In such situations, a private lender can come in, fund the repairs effectively returning house to a sellable state, and flip it for a profit.
Short approval process
A private loan will be deposited into your account within several days to a few weeks after the application is made if the house qualifies for the loan. Convectional loans on the other hand often take between 30 to 45 days to process.
For many borrowers, the fast processing is far more important than the high interest rates. When an opportunity shows up, the most important thing is that you immediately acquire the funds to take advantage. If you have to pay more to get the funds sooner, to borrowers that’s an acceptable tradeoff.
Short payback periods
Most traditional mortgages are repaid in between 15 and 30 years. Some bigger loans may even be repaid in longer periods. That’s where it hurts because most private lenders will need their money back in as little as 6 months to 12 months. Of course some will allow up to 18 months but that’s still very short.
At first glance, this extremely short repayment period may seem unimportant until you fail to find a buyer for the house as anticipated. Many times it forces you to consider refinancing, an option that may become a distant dream if your credit card score is bad.
High interest rates
Be prepared for higher lending rates if you’re borrowing from a private lender. In fact, some private lenders will charge you more than double the conventional lending rates. So, if you would normally pay between 6% and 12% for traditional mortgages, you can expect between 12% and 25% mortgage rates from private lenders.
The reason for the high lending rates is that these private lenders don’t care so much about your credit card score. These loans are typically secured by the property in question, a huge risk on the part of the lender.
With these pros and cons, it should be easier for you to make a wise decision. Remember that every situation must always be treated individually. Sometimes it helps to obtain funds from private lenders, but that should never be the rule. If you think you may need a bit of time to repay the loan or if the interest rate looks too high, consider a conventional mortgage loan.