Are you someone that has poor credit? Are you struggling to qualify for a traditional mortgage? Do you have a unique source of income? Maybe you’re only planning on owning your home for a short period of time? Private mortgage financing might be for you! It is a less common method to obtain a mortgage but it’s a good alternative under unique circumstances and it could be the answer you are looking for.
WHAT IS PRIVATE MORTGAGE FINANCING?
Private mortgage financing is when the lender of the mortgage is an individual such as a friend or family member, or the lender is a business that is neither a bank or financial institution.
HOW DOES A PRIVATE MORTGAGE WORK?
A private mortgage would work the exact same way as a traditional mortgage, where an individual would receive a loan and they are expected to make payments plus interest within certain time periods in order to repay that loan.
The Lender of a private mortgage however, would likely view the loan as an investment opportunity where they can gain profit from the interest. That is why this is a good option for people that don’t meet the criteria for a traditional mortgage. Private lenders tend to be less concerned with things like your credit score and income confirmation documentation than a bank or financial institution would be. These loans are also typically short in length and have a high interest rate.
WHAT ARE THE PROS AND CONS OF A PRIVATE MORTGAGE?
Private mortgages are not for everyone. Although they can be a good alternative for people with limited options, it does come with some risk. It is suggested that the pros and cons of a private mortgage are considered and you consult with a mortgage broker before deciding if it is the right solution for you.
Pros of a Private Mortgage:
- The approval process is faster. There are fewer qualifications and less required documents in order to be approved.
- Better chance of approval for people with less ideal circumstances such as poor credit, limited down payment, inconsistent income or purchasing a unique property.
- There is more flexibility. Private lenders set their own guidelines for the loan which gives you the opportunity to negotiate some of the terms of the contract such as down payment amounts, interest rates and the length.
Cons of a Private Mortgage:
- The interest rates are higher. Interest rates on a private mortgage can sometimes be double the interest rates of a traditional mortgage.
- The period to payback the loan is short. This period can range from 6 months to 3 years depending on your loan.
- There are additional fees associated with a private mortgage. Your lender may require you to pay expenses such as lender fees, broker fees and legal fees.
HOW DOES SOMEONE GET A PRIVATE MORTGAGE?
The first step to getting a private mortgage is to find a private lender. There are a few different options available to find one. You may want to consider asking if a friend or family member is able to give you a loan. If that is not an option for you then a mortgage broker will be able to recommend reputable private lenders.
It is suggested that you work with a professional in order to draft your mortgage agreement. A mortgage agent’s experience in the industry will be valuable when it comes to understanding the legalities in the contract, confirming the process is being done correctly and supporting you in negotiation to ensure you get the best loan possible.
Private mortgages are easier to qualify for than a traditional mortgage but you do still need to meet some requirements. In order to qualify you will need to provide:
- Proof of income
- Proof of down payment
- Proof of sellable property
Once someone receives qualification, reaches an agreement with the lender on the terms of the contract and the paperwork has been signed you will be good to go.
When a private mortgage goes as planned everyone involved should be able to benefit from it. The lender would have a successful investment and the homeowner would have the solutions they needed to get into the housing market. With that being said, it is a riskier option for both the borrower and the lender so it isn’t the best fit for everyone.
If you are someone who is considering a private mortgage, there might be other options that fit your needs. Don’t just make a quick decision, visit a mortgage broker and make sure you explore all of your options.