Private Lending and Private Mortgages

Private lending and private mortgages are a concept that is used by investors to branch outside of traditional investing programs. They employ the use of their own private funds to finance properties for people aiming to purchase or refinance real estate. Private loans are short-term and interest-only loans that ranges from 1 to 3 years. An interesting fact to note about private lending is that, in these interest-only loans, homeowners are not required to pay the mortgage principal down and are only required to pay interest payments every month.

There are a number of circumstances where a person would use a private lending source. Some of these circumstances are listed as follows:

• A borrower is aiming to purchase an unconventional property which a prime lender or a bank would not finance.
• The borrower wants fast financing and does not want to wait for a traditional approval process
• The borrower has a bad credit history and is being rejected by conventional lenders
• The borrower requires a short-term loan
• The borrower has a non-confirmable source of income which is preventing them from obtaining a traditional mortgage.

An interesting aspect about private lending to note is that the interest rates on such types of loans are higher when compared to prime lenders. The interest rate for private lending or private mortgages ranges from 6% to 18%. Furthermore, for private lending, there are usually lender’s fees which range from 1% – 3% as well as broker fees.  

When borrowing or applying for mortgages from a prime lender or a bank, there are security or assurance forms that must be filled out by the borrower to certify that they can pay back the loan received. In the case of private lending, the lender secures their investment using a note and mortgage or any other type of security instrument which can include receiving a return on investment, splitting the equity, or can be a combination of both.

Furthermore, prime lenders and banks have a pre-determined duration within which the loan must be paid back by the borrower. However, in the case of private lending, the terms of the loan are discussed and determined by the lender and the borrower. Interestingly, the interest rate can be adjusted by the investor if the property is being used for the purpose of investment.

In addition, it is also imperative to select a private lender that specializes in a certain category. When obtaining a loan from a private lender, the category in which they belong to is an important factor to consider. As such, following are some examples of categories in which private lenders may belong to:

• Commercial vs Residential: In this category, private lenders will focus on a few property types to focus their investments.
• Refinance for Debt Consolidation vs Renovation: In some cases, lenders will specialize on the purpose of a mortgage loan. Certain lenders may only provide loans on the basis that the borrower is refinancing with the intention of purchasing another property.
• Preference to Urban Areas: Private lenders are geared towards financing property in urban areas because these areas have more real estate value and stronger markets.
• Preference to Regions They Live In: Private lenders are comfortable when they are investing in the area that they are living due to the fact that it allows for personal evaluation of the property.

Since there are always risks involved when lending money to borrowers privately, to compensate for the risks, private lenders have strict guidelines which includes several factors to mitigate risks. The first factor is pertinent to the value of the property and the property type. This is the most important factor that is considered when approving a private mortgage. The mortgaged property should be in good condition and must undergo a strict appraisal before the mortgage is approved. If the borrower has a poor credit score, they are considered as a riskier client as well.

The second factor that is considered by private lenders is the income of the borrower. The income of the borrower can fall into two categories which are confirmable and non-confirmable income. Lenders prefer confirmable income because they are proven through Notice of Assessments (NOAs). Non-confirmable income is more common amongst self-employed borrowers or who are commission-based employees in a company. This forces lenders to use an estimate of the income that is based on the average income typical of the employment.