Are you having a tough time qualifying for a mortgage from a traditional lender? Whether you fail to meet the lender's qualification criteria, don't qualify for a FHA or VA loan, or wish to purchase a home the lender won't finance, a private lender may be your only other option.
Why Choose a Private Lender?
People with high credit scores, verifiable income sources and substantial down payments have the luxury of working with lenders with the most competitive financing terms. On the other hand, individuals without great credit scores or other factors that make them attractive to lenders may not be able to find a conventional lender that is willing to approve a mortgage application.
"Banks require a lot of documentation, and sometimes you won't look the way they want you to look - even if you're more than able to repay the loan," notes The Balance. If that is the case, you may need to turn to a private lender. While being unable to provide sufficient documentation and a "clear paper trail" can keep a person from being able to secure home loan approval from a bank, that is not the only reason an individual may find it beneficial to work with a private lender.
In some instances, it's the home the applicant wants to purchase that is causing problems. If the home gets appraised at less than the amount of the loan, or if the home has structural issues that make it unsafe to occupy, getting a mortgage loan from any source can be difficult. In fact, "homes that need extensive renovations generally can't qualify for conventional mortgages, no matter how good the borrower's credit is," Brian Frederick, a certified financial planner, told Nasdaq.com.
Types of Private Mortgage Lenders
There are two types of private mortgage lenders to consider.
Private Investment Lenders
Private investment lenders consist of individuals and groups that scrutinize loan applications on an individual basis and make the decision to lend based on risk versus the potential for profit.
Oftentimes, these lenders much more willing to accept a high level of risk because they don't have to answer to stockholders or other entities. Furthermore, they are aware that applicants may have limited options and may be willing to accept less favorable loan terms.
According to Ratehub, interest rates for mortgages from private lenders generally range from 10 - 18 percent. "Mortgage rates are so high because private lenders don't usually require perfect credit," notes Nasdaq.com.
Examples of private investment lenders include FMC Capital and Private Mortgage Financing Partners. You can browse a directory of private money lenders at PrivateMoneyLendingGuide.com. In order to view options, you will need to enter details about the type and size of loan you need, as well as specify your state.
Private Personal Lenders
Borrowing money from someone you know is another alternative to a traditional mortgage provider. When considering a private personal lender, here are a few factors to keep in mind:
This should not be a casual verbal agreement. Instead, solicit the assistance of an attorney or title company to draft the loan agreement in a legally binding document. Nolo.com also suggests creating a document that details the repayment schedule.
There are tax implications for lending money to friends or family, both for the borrower and the person lending the money. Consult a Certified Public Accountant (CPA) to make sure these tax implications are understood and are taken into consideration when deciding on the interest rate and repayment terms.
Money changing hands between friends and family can change the dynamics of the relationship. Be sure you are prepared for this.
Explore Your Options
While a private lender can be a good home loan option in some situations, it is not ideal for people who can qualify for a conventional loan. Explore your options before signing on the dotted line just in case you find a more cost-efficient mortgage product elsewhere. If you decide to go with a private lender, be sure to request a loan that is free of a prepayment penalty. This ensures that you can refinance the loan a few years down the road as your credit score increases or the home appreciates in value.