Even though that traditional mortgage loans offered by banks and lending institutions are probably the best options in order to obtain finance to purchase a home, private mortgage lenders have also become very popular and many people resort to them when searching for finance. The reasons are varied and all can be resumed by the fact that traditional mortgage loans lack the flexibility that private loans feature.
As the name suggests, private mortgage loans are offered by private lenders. Although traditional financing sources such as banks, lending institutions, or government agencies play a major role in financial enterprise, the private mortgage loan system has curved a niche for itself.
Private Mortgages: The Concept
Private mortgage loans are usually short-term hard money or asset-based loans. Generally, these loans are granted depending on the equity and value of the property being put up as collateral, not on the borrower's credit. People who don't want to go for conventional loans can easily take advantage of private mortgage loans. These loans are a source of funding for professional real estate investors who wish to acquire, rehabilitate, or cash out equity of income producing property.
Private mortgage loans are easily processed and eventually save a lot of time. Moreover, these are very secure because they represent a maximum of 65% to 70% of the appraised value of income producing property. Definitely the rates of interest in private mortgage loans are higher than their conventional counterpart. For example, in a private mortgage loan interest rates of 14% to 18% are added to four to eight points. Thus, the borrower is paying more than 20% annually. It is a good deal for the private lenders.
On the other hand, the rates of interest in a conventional mortgage loan are very low ranging from 7% to 10%. But shockingly majority of the people seem to run after private mortgage loans even though the rate of interest is relatively higher than the one from conventional loans. This is due to the fact that private mortgage loans are more accessible.
Loan Flexibility
In order to find out the reasons for the increasing popularity of private mortgage loans many motives can be noted. First and foremost, the speedy manner in which approval is handled. While a conventional loan takes 45 to 90 days to fund, a private mortgage loan can easily be accessed within 10 days. In fact conventional loans take more time since institutional lenders need to obtain an appraisal of the property's value, perform a detailed examination of the borrower's credit history, and thoroughly evaluate the borrower's current financial status. But loans in private terms can be quickly accessed, as the property itself is the main criteria used to determine loan eligibility. Furthermore, the Private Mortgage lender can make a decision within 24 hours of receiving information, whereas institutional mortgage loans must be approved by a loan committee that may meet only twice a month.
Easy application process is another important point why private mortgage loan scores higher than conventional ones. Private Mortgage lenders generally base their decisions on the asset used for collateral. But a borrower's lack of up-to-date personal financial information would negate or at least delay approval for an institutional mortgage.
A borrower may not qualify for an institutional mortgage loan for reasons ranging from low credit scores or too much debt. Institutional lenders are concerned with both the appraised value of the property and the borrower and property credit. However, Private Mortgage lenders are concerned only with the appraised value, as long as it represents a fair market price.
