The ultimate dream of most people is to own a home of their own or invest in real estate. While some people acquire their homes with ease, some others struggle to fulfil this dream and would require a mortgage loan. But it is increasingly difficult to get approved on a mortgage loan from mainstream institutional lenders such as banks, as people get disappointed at the last minute after investing a whole lot of time, money, and effort into acquiring the mortgage amount they seek. Besides, it might take longer to get approved for a mortgage in a bank than getting a loan from a private lender.
In order to help people who struggle to get mortgage loans the typical way, private money lenders offer private loans, which has some advantages over the typical mortgage investment corporation.
What’s private lending?
A private mortgage or loan is simply credit services offered by an individual or private institution through private financing for the purchase of a property. A private lender, on the other hand, is an institution financed through a private source of funds. These private investors may include friends, family, business, or even privately-owned financial institutions. These private lenders offer home loans to intending homeowners, depending on their financial situation.
Unlike traditional lenders with stringent guidelines and qualifications that have to be met before people can get their mortgage loans, private money lenders are less strict. However, their rates are higher than what you would get from a traditional bank because they involve a higher level of risk. Note that there are private lenders who would be willing to lend financial resources at affordable interest rates. So, shop around for the best terms of borrowing.
Sure, traditional banks try to make money off of the interest they charge on their loans. However, just like any lending institution, banks are in business to make money, and they typically charge higher interest rates to ensure their profit from the interest they charge you. Private money loans are often discounted to attract a good loan portfolio and ensure the highest return possible at the lowest cost to the investors. This is good news for investors seeking private lending services.
It is imperative for all private lenders to learn as much about how private money lending works as possible to get the most return possible for it. Fortunately, because private money loans are made in large amounts, it is not necessary to make more than 30% on your investment in order to recoup your money. This is because while 30% is a good return on your investment, it would no longer be enough to cover interest or fees associated with your loan.
Of course, it is essential also to realize that not only is it possible to keep the lenders’ fees and interest low, but it is also possible to earn a high return by having a high level of equity in your property. Most investors strive for over 60% LTV (loan to value) on their deals, and when you put your loan amount on the agreement, the lenders will require you to borrow a minimum amount of equity before they will approve your loan. If you are a real pilot and know there is a great deal to be had, you may want to allow the lender to add a little bit more than 60% LTV on top of the amount you have borrowed. That way, you have an advocate on the deal that may convince the lender to allow you to borrow more money at the same time.
How private lending works
The concept of a private mortgage loan is quite simple; there are three main elements required for a private mortgage loan to take place: a lender, a borrower, and lots of paperwork. For what it’s worth, a private loan is inarguably your best chance of securing your dream property type with no money of your own, particularly if you do not have a great credit score or credit history.
Because of the way banks evaluate loan applications and the rates they charge, it is not uncommon for mortgage applications to get denied in the banks, forcing borrowers to seek other funding options. The reason behind this is that the banks know that there is always a risk of borrower default and that borrowers with larger loans are at a greater risk of being unable to repay their loans.
The banks also hugely rely on loan collateral and property to return these loans. When a loan application is deemed risky by one lender, that lender has to bear the financial losses, whereas the banks only have to pay if they get paid. These characteristics make it challenging for banks to advance credit services to borrowers with a bad credit score or insufficient credit history. Given the fact that most private lenders consider more than just credit score numbers when providing credit-related services, it is possible for such borrowers to access credit service from private lenders.
It should also be noted that not all private money lenders are the same. Some private money lenders pools their funds together, establishing a fund, using various investors that each put a certain amount of money into the fund. These investors are often just interested in making a small return on their investment, so they will put their money into the same mutual fund as other investors may.
Because of this, it is possible for these funds to be extremely large, though usually by lending money to a wide variety of borrowers and borrowers with smaller balances, in hopes of making even greater profits in the future and having a more significant long term effect on the private money fund.
Summary
It can be extremely difficult for most potential borrowers to secure a mortgage loan, with conventional mortgage lenders and large financial institutions having more restrictions lately. Hence, the increasing popularity of private lenders. If you are unable to secure a loan from banks, you may want to seek financial help from private lenders.
