Home > Mortgage Loans > Private Mortgage Loans Provide Short Term Financing Solution
Private Mortgage Loans Provide Short Term Financing Solution |
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A viable option to traditional financing
sources such as banks, lending institutions, or government agencies are private lenders who offer short-term (6 months to 3 years) hard money or asset-based private mortgage loans. The decision to give the loan is based on the equity and value of the property being put up as collateral, not on the borrower's credit. Professional real estate investors who wish to acquire, rehabilitate, or cash out equity of income producing property, and those who otherwise would not qualify for conventional financing are usually the customers for private mortgage loans. Real estate investors who need immediate financing without financial documentation required by traditional institutional financiers usually resort to taking private mortgage loans, which are very secure as they represent a maximum of 65%-70% of the appraised value of income producing property. However, in the case of non-income producing property the amount lent is a maximum of 55% loan to value. In the current low interest rate atmosphere, interest rates on first liens could be in the range of 12%-14% and 16%-18% on second liens. Why borrow private money? Conventional mortgage loans attract interest rates ranging between 7% and 10% whereas when you borrow private money, interest rates of 14%-18% are added to four to eight points whereby the borrower will be paying more than 20% annually. Surely, private mortgage lenders find this attractive but why should borrowers pay so much? The reasons for this fall into four categories: Speed of closing: Getting funds against conventional mortgage loans is a time consuming process because the institutional lenders have to get an appraisal of the property's value, perform a detailed examination of the borrower's credit history, and thoroughly evaluate the borrower's current financial status. This might take between 45 days and 90 days as against 7 days to 10 days, in which private mortgage lenders usually complete a transaction. For private loans, less information is required regarding the borrower as the property itself is the main criterion used for loan eligibility. Since the lending is at a considerably lower LTV ratio, the private mortgage lender is well protected: 65% vs. 80%-90% for institutional lenders. Moreover, a private mortgage lender can decide within 24 hours of receiving information whereas institutional mortgage loans have to be approved by a loan committee that may meet only once a fortnight. Easy Application Process: For institutional mortgage loans, absence of a borrower's up-to-date financial information can negate or delay the approval process. On the other hand, this lack of information has no effect on a private mortgage loan approval as private lenders base their decision on the value of the property used for collateral. If the value of the property is high enough and the income being generated from it is enough to pay the interest on the debt, the private lender's decision will not be affected by the borrower's personal financial situation. Non-availability of other money resources If a borrower has low credit score or excessive debt and if the property itself cannot support the type of loan desired by the borrower, he may not qualify for institutional mortgage loans. Even if there is significant equity in the property, many institutional lenders will not give loan amounts under $500,000 and will not lend second lien money. In such a case private mortgage loan might be the only answer. Private lenders are only concerned with appraised value of the property as long as it represents a fair market price whereas institutional lenders are concerned with both the appraised value of the property and borrower and property credit. In the case of private mortgage lenders, the borrower can borrow more and have less of his capital invested in the property since the lender bases the mortgage loans on the appraised value of the property. Moreover, the borrower is not penalized for buying a property at a significant discount to market value. |
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