Mr. Parker is a financial writer associated with the community of “Mortgagefit.com”. He has written more than 500 articles on loans, money-saving tips, foreclosure, mortgage, budgeting, bankruptcy, insurance and so on. He is also a Kindle publishing enthusiasts and associated with various forums and communities.
Soon after the housing market boom and the sub-prime mortgage crisis, big banks and the mortgage lenders have adopted more stringent lending guidelines. Due to the more stringent guidelines, more and more first time home buyers and investors are being rejected for mortgage loans. While it has become tougher to obtain a traditional mortgage, there is another option for buyers; a private mortgage.
Private mortgages You might not be familiar with the term ‘private mortgage’, but it is simply a loan from a private party. Instead of getting a mortgage from a mainstream mortgage lender, you get it from a lender which is either a private investor or a private mortgage lending company. The lender might be a complete stranger or they might be a family member or friend as well. Either way, it is a legal agreement and should be treated as such, no matter who the lender is.
The private mortgage loans – Which category of borrowers borrow such loans?
Now, as a borrower, you must be wondering which kind of borrowers are the ones that borrow using private mortgage loans. Well, borrowers who couldn’t qualify for a traditional mortgage loans, usually opt for private mortgage loans. Apart from borrowers who could not qualify for a traditional loan, those investors or buyers who wish to get a quick turnaround time on financing are using loans from a private institution. Since the traditional lending environment is getting harder day by day, most of the buyers who urgently need a home are the ones who are turning to the alternative lending options.
For borrowers with a tarnished credit score, getting a private mortgage is usually a better option and most likely the only option. Since private lenders are lending to people with a less than stellar financial history, they charge higher rates than the traditional lenders. Most private lenders also carry shorter repayment terms than conventional mortgage lenders. However, all private loans are negotiable and if you have a good relationship with the lender, you may be able to negotiate great terms.
Private mortgage lending – Are there any prospective risks of this kind of lending?
Life always comes with surprises, big or small! Hence, there are risks with borrowing money from anyone, be it a traditional lender or obtaining a private mortgage loan. Here are some considerations that you need to take into account, when borrowing money from a private lender.
Will the financial security of the lender be affected if you default on the private mortgage loan? Will there be a chance they will have to file bankruptcy or their retirement be at risk?
Will the personal relation between you and the lender change if you take out a private mortgage loan?
Who are the people in the entire scenario who might suffer in the event of a default?
Well, when a private mortgage lender, takes the decision of investing in such ventures, they are already taking a huge risk. Many private lenders do not have policies in place to account for situations that arise with Real Estate. Make sure these situations are accounted for when borrowing from a private lender.
Is there adequate home insurance coverage on the property?
Is the property in a good condition, if not does the borrower have enough money to repair the home?
Are there any other liens on the property, which might take precedence over private mortgage lender?
Sealing the deal on the private mortgage agreement
A private mortgage loan, doesn’t mean that it can be a no-document loan. Much like a traditional loan, private loans should also have the required documents. Both parties should use a loan agreement that sets clear expectations of the agreement and explains all circumstances. With the right kind of documentation, each party will be protected better in cases of legal and tax disputes. Some details that should be included:
1. When are the payments due?
2. Where or how the payments are to be made?
3. Whether or not the borrower can prepay on the mortgage loan?
4. What would happen if the payments aren’t received by the lender?
5. What are the late fees?
6. What is the collateral?
7. Can the loan or property be assigned?
Securing the interest of the lender – Despite having a close friend as the lender
As private mortgage lenders usually can be friends and your family members, it is certainly a good and wise idea to secure their interest. In dire financial situations when you fail to repay the loan, the lender might seize the property and sell it off to recuperate a portion of the funds that they had lent. There are instances, when a borrower who has both the ability and intention to repay is sued. If the borrower holds title without a lien, the creditors can go after his home and equity in the property. If you can use collateral to secure the loan, the lender stays protected by having first position over any lawsuits.
While considering a private mortgage loan, you should think about the worst case scenarios. Will a private loan cause irreparable damage between friends or family and is it worth it? For accurate documentation, you should work with the experts who are qualified and speak to attorneys who can help you throughout the process. Know everything about the process, before taking the plunge and get quotes from a few private mortgage lenders before signing the dotted line.