The Ins and Outs of Getting a Mortgage Loan from Private Lenders

Private lenders can be a great option for getting a mortgage loan, especially if you don’t qualify for a traditional loan. As interest rates rise and the housing market cools, more borrowers may need to look beyond banks and credit unions to finance their home purchases In this comprehensive guide, we’ll break down everything you need to know about getting a mortgage from private lenders

What are Private Lenders?

Private lenders are individuals or companies that offer mortgage loans but are not affiliated with banks or government agencies They have more flexibility than traditional lenders to set their own lending criteria and loan terms Private lenders are not bound by the strict regulations and standards that banks and credit unions must follow,

Some examples of private lenders include:

• Friends or family members
• Angel investors
• Hedge funds
• Mortgage companies and brokers
• Real estate investors

Because private lenders don’t have to adhere to federal conforming loan limits and underwriting requirements, they can offer financing to borrowers who may not qualify through traditional channels. This makes them an option for self-employed borrowers, those with poor credit, or unique properties like vacation rentals.

Benefits of Private Lenders

There are several advantages to getting a mortgage loan through a private lender rather than a bank

Quicker Process

The loan approval process is often much faster with private lenders, sometimes taking just days or weeks rather than months. They don’t have to navigate the same bureaucracy and red tape that banks do.

Flexible Qualifications

Private lenders can set their own criteria for loan approval based on factors like your income, assets, down payment amount, and the property itself. This means they may approve borrowers who don’t meet the strict credit score, debt-to-income, or employment history requirements of banks.

Loan Term Variety

Private lenders offer more variety in loan terms. While banks typically offer 15 or 30-year fixed mortgages, private lenders may offer terms ranging from 6 months to 30 years or interest-only loans. This helps real estate investors finance short-term projects.

Lower Down Payments

Some private lenders are willing to accept lower down payments than the typical 20% required by most banks. This helps first-time homebuyers who don’t have a lot saved for a down payment.

Interest Rates

In some cases, private lenders can offer lower interest rates than banks, especially for borrowers with great credit scores or unique situations like a family member providing the loan.

Investment Property Financing

Private lenders are often more open to financing investment properties that don’t meet conventional lending standards. This includes multi-family properties, vacation rentals, and rehabs/fixer-uppers.

Alternative Income Documentation

They may be more flexible in terms of verifying and documenting income from sources like rental properties, bonuses, investments, etc. This helps self-employed and unconventional borrowers.

Drawbacks of Private Lenders

While private lending has its advantages, there are also some potential drawbacks to consider:

Higher Interest Rates

Because private lenders take on more risk, they will often charge higher interest rates and fees than traditional lenders. Rates can vary greatly though, so be sure to shop around.

Large Down Payments

Even though some private lenders accept low down payments, many still require 20-50% down to reduce their risk on the loan. This may be prohibitive for some buyers.

Shorter Loan Terms

Private loans often come with much shorter repayment terms of 1-7 years. This results in higher monthly payments, so refinancing into a longer term may be necessary.

Variable Rates

Most private loans have adjustable interest rates that can start low but increase over time. This makes your monthly payments unpredictable.

Prepayment Penalties

Many private lenders charge prepayment penalties for paying off your loan early. This prevents you from refinancing when rates drop.

Fewer Borrower Protections

Private loans don’t offer the same protections, oversight, and regulations that banks must provide. This raises the risk of predatory lending or mortgage fraud.

As you can see, private lending comes with trade-offs. The added flexibility and easier qualifications come at the cost of higher rates and fewer safeguards.

How to Find Private Lenders

If you decide private lending is right for you, here are some tips for finding lenders:

• Ask real estate agents, financial advisors, or attorneys for referrals
• Search online directory sites like LendingHome, Lendistry, and LoanMLS
• Check with local real estate investment clubs
• Look for ads from private lenders on sites like Craigslist and LendingTree
• See if any friends or family members can offer you financing
• Contact mortgage brokers who work with private lenders
• Reach out to companies buying and selling investment properties in your area

Vet any potential lenders thoroughly before submitting a loan application. Check their licensing, look for past lawsuits or complaints, and verify their interest rates and terms. Protect yourself by having an experienced real estate attorney review any contracts before you sign.

Questions to Ask Prospective Lenders

When comparing private lenders, here are some key questions to ask:

• What are your rates and fees? Get specifics on interest rates, origination fees, and any additional costs.

• What loan terms do you offer? Find out available repayment terms and if there are prepayment penalties.

• What are your loan requirements? Ask about minimum credit scores, down payment amounts, and any employment/income stipulations.

• How long does the application process take? A short approval timeline is a major perk of private lending.

• Do you service the loans or sell them? Find out if the lender keeps the loan or sells it to another company.

• What happens if I miss payments? Learn about the process and penalties for late payments.

• What documents and information do you require? This gives you a sense of how stringent their approval criteria is.

Asking these questions upfront ensures you understand the lender’s terms and requirements before spending time applying for a loan that you may not actually qualify for or want.

Tips for Getting Approved by Private Lenders

If your goal is to get approved for a private loan, here are some tips:

• Shop around – Compare quotes from multiple lenders to find the best rates and programs for your situation. Rates can vary drastically between private lenders.

• Highlight your equity – Private lenders focus heavily on loan-to-value ratio. The more equity you have, the better your chances.

• Bring a larger down payment – Bringing at least 20-25% down shows private lenders you’re financially committed.

• Improve your credit – Many private lenders still check your credit. Boosting your score can help your chances.

• Explain past credit issues – If you have credit blemishes, write an explanation letter highlighting why you’re still a good risk.

• Use a co-signer – Adding a co-signer with better credit can improve your chances of approval.

• Provide alternative income docs – Supply bank statements, tax returns, profit and loss statements to verify your income.

• Pick a property they want to finance – Some properties, like vacation rentals, are tougher for private lenders to finance.

With the right preparation and research, using a private lender can be an effective way to finance a home purchase when traditional loans aren’t an option. Just be sure to understand the risks and rewards before committing.