In Tough Lending Times, Private Mortgages are on the Rise

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Banks, mortgages lenders and other traditional lenders may have stricter lending criteria, but private mortgage lenders may be reaping the benefits. Private mortgage lending has become a more popular option for various types of borrowers and for various reasons. According to the LifeComps Commercial Mortgage Performance Index, private mortgages provided a 2.79 percent total return in the second quarter 2011, which is an increase over the 1.72 percent in the first quarter.

Who

The types of borrowers that tend to apply for private mortgages fall into two categories: 1. Borrowers that cannot qualify for a traditional mortgage 2. Investors or buyers that want a quick turnaround time on financing.  In a lending environment that is harder than ever to obtain traditional financing, borrowers are turning to alternative methods to obtain the financing they need to realize the dream of homeownership.

What

Private mortgage may not be a term you are familiar with, but the concept is similar to how it sounds. Instead of obtaining a mortgage or loan from a mainstream lender, the lender is either a private investor or private lending company. A private mortgage lender may be a family member or it may be a complete stranger. Either way, the private mortgage is a legally binding agreement and should be treated as such. While private mortgages tend to be easier for poor credit borrowers to obtain and faster than applying for traditional mortgages, private mortgages also have some drawbacks. Private mortgages tend to have: 1. Higher interest rates than traditional lenders 2. Shorter terms than traditional mortgages (usually terms of five years or less).  The terms and conditions on a private mortgage, however, are negotiable, so you may be able to work out a deal with the person you know or the investor.

How

If you’re in the market for a private mortgage, you can find someone you know that has and is willing to lend you the money. You also have the option to go through a private mortgage lender, which acts as a matchmaker between borrowers like you and investors that have money to lend. Either way, once you find the private lender, you then go through the negotiation of the terms and conditions of the private mortgage. Once the down payment, mortgage amount, interest rate and number of years of the mortgage are settled, all of this information is put in writing. The borrower signs a promissory note agreeing to repay the mortgage loan. A private mortgage works the same as a traditional mortgage from that point on. Private mortgages often give borrowers the chance they need to buy a home and build their credit. If you do obtain a private mortgage, ask the lender to report the mortgage to the credit bureaus. If you always make your loan payments on time, this helps to increase your credit score. With a higher credit score, when the short-term private mortgage is up, you can refinance into a traditional mortgage, which usually includes a lower interest rate and better terms and conditions than the private mortgage.

Make sure you keep on top of your credit score and monitor your reports, so you can put yourself  in the best borrowing position.

 

  • Cathi Craig

    How do I go about finding companies that are private mortgage lenders? And did you mean that once your credit score is increased by timely payments you can qualify for a traditional mortgage at a lower rate and then refinance the private mortgage to obtain a lower interest rate on the remainder of the loan?