If you’re under the assumption that private lenders a a last-resort borrowing option, you have it all wrong. More and more borrower, including real estate investors are considering and making use of private lenders due to all of the recent mortgage rule changes that have occurred within the last year.
Private funding is an ideal option to consider if you’re an investor who is looking for funding, but you’re tired of dealing with the strict lending rules that traditional banks need to follow. Although it may cost you a bit more in the end, it’s a much faster and easier process for borrowing for your investment.
So, if you’re planning on purchasing and investing in a small property with the goal of collecting rental income, private funding is definitely an option you want to consider. The fact that you don’t have to come up with a 20 percent down payment a smaller property, and you can get financing up to 90% through a private lender, also makes it that much more appealing, to you the borrower.
Now, if you are a real estate investor who works on commission or you’re self employed, and you’re applying for a private loan, keep in mind you’ll also be required to provide third-party proof of your income so that it can be validated in order to qualify for your loan. If you’re unable to provide the third-party validation, you’ll have to come up with a 10 percent down payment before you apply.
What’s The Difference Between a Private Mortgage Lender & a Bank?
There are a number of things that set private lenders apart from banks:
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Source of funding for private lenders – Individual investors and investor groups. If you’re dealing with a larger lender, funding could be coming from several different sources, whereas most smaller lenders use their own funds when lending. Either way, this short-term investment can be sold off before the year is up if you’d like, so you don’t need to owe a balance for too long.
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The application process – When dealing with banks you are under scruitiny, the opposite is true when working with a private lender. Private lenders focus more on the property itself, since these types of loans are not insured. The property is their collateral if you default. However, bare in mind that if you’re buying a property in a small town or rural area, you might not qualify for the amount of funds you require to make your purchase, using a private lender. You may only qualify for about a 65 percent LTV ratio.
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The need for second mortgage funding – Since many bank don’t grant second mortgages, one of the most popular uses for private loan borrowers is to secure a second mortgage, in order to supplement bank financing. If you’re an investor in need of a short-term loan to build or purchase a property, fix it up, then resell it, or want to buy a property going through foreclosure, private funding is the way to go.
What’s Next?
Private lenders can be difficult to access alone. Fortunately, your mortgage broker will have both private lenders and investors they can put you in connection with. Be sure to ask your mortgage broker a lot of questions, to ensure they have enough experience to help you meet your financial goals and objectives.
Provide your mortgage broker with some details on your loan:
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The purpose/reason you need the funding (i.e. bridge financing, consolidating debt, construction, purchase, etc)
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Loan plausibility
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Ability to make on-time loan payments
Once you provide this information, your mortgage broker will be able to assist with planning an exit strategy and structure your deal.
Now that you understand how private lending works and how available it actually is to you, you’ll find it easier to navigate with the new strict mortgage loan restrictions and rules. Most importantly, knowing that although there may be a higher interest rate, it’s a short-term solution (1 to 2 years maximum).
AKAL Mortgage can help you find alternative lenders for private financing. Contact our mortgage team to find your lender today.
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