The Complete Guide to Private Mortgage Loans
Whether you’ve discovered a passion for flipping and selling old homes or you want to start your own property rental business, you’re going to need funding.
Applying for a traditional loan from a bank or credit union is typically the first option people think of when they want to buy property, but not everyone is able to qualify. Your credit score may be too low or your income may be insufficient.
Luckily, you have other options.
If you’re struggling to fund your business ventures or dream of home ownership through the bank, you might consider a private mortgage instead.
Borrowing from a private mortgage lender can be highly beneficial for everyone involved. However, finding reputable private lenders in Florida can be a bit of a challenge. For starters, these individuals aren’t typically as well-known as large, nationwide mortgage companies, and typically rely on client referrals to get the word out about their services.
At Associates Home Loan of Florida Inc., we make it easy to match up with great private lenders in the local Tampa area. However, it’s still important to understand how this type of lending works so that you can decide if it’s the right funding solution for you. The purpose of this guide is to educate our readers on what private lending is, as well as the associated benefits and risks.
What is a Private Mortgage Loan?
Private lending is direct funding from an individual. There are no banks or licensed issuers involved – it is, as the name suggests, private. The investor is typically a family member, friend, or private business like Associates Home Loan of Florida Inc.
Using a private loan to finance a mortgage is not the most common route, but it’s not unheard of, either. Some borrowers use this type of loan to start their own rental business or to flip homes for profit. It may also be a good option for home buyers who are unable to qualify for a traditional mortgage loan. By the end of this guide, you should have a good idea of whether or not private lending is the best funding choice for your situation.
Benefits of Private Lending
There are many reasons you might consider private money lending to fund your property purchase. Some of the benefits are:
- Faster Funding: Taking out a loan from the bank is a long process, and that’s if you’re approved to begin with. Because there’s far less documentation involved and fewer hoops to jump through, private money loans provide funding in days, not weeks.
- Easy to Qualify: Perhaps the greatest advantage of a private mortgage is how easy it is to qualify. Yes, you will still be required to provide your credit history and proof of income to determine things like the interest rate and payback period. But even if you have a poor credit score and an unstable income, you’ll still be able to qualify if your investor believes that your project will turn a profit.
- Greater Flexibility: Banks will typically offer a few standard mortgage terms that you can choose from. But because a private loan is not bound by the same rules and regulations, you have greater flexibility to set terms that work best for both you and your lender.
Private Lending Risks
Before you make any major financial decision, it’s important to do your research and understand what risks are involved. Private mortgage loans can be highly advantageous, but they certainly aren’t for everyone in every situation.
Some risks you should be aware of before you take out a private loan are:
- Higher Interest Rates: Compared to a traditional bank loan, private mortgage loans have higher interest rates – as high as 20% in some cases. Because private lenders don’t turn down borrowers with bad credit, they have to charge higher interest rates to secure their riskier investment.
- Short Payback Periods: The main reason most people don’t use a private money lender for long-term property investments is because the payback period is typically very short. Most traditional mortgages are paid back over 30 years, while most private mortgages are paid back anywhere between 6 months and several years. This short time-frame is perfect for house flippers, but is not usually ideal for a family looking to settle down.
Who is Private Lending For?
Before you go looking for private mortgage lenders Florida, you want to be sure that this type of loan is a good fit for you. Considering the benefits and risks involved, private lending is typically a good option for:
- House Flippers: If binge watching HGTV has inspired you to start flipping and selling homes, a private loan will speed up the buying process and keep you competitive with all-cash buyers.
- Time-Sensitive Investors: House flippers aren’t the only ones who might want to buy a house quickly. If you don’t have time to go through the process of getting a traditional mortgage, private mortgage lenders can offer you quick financing.
- Young Home Buyers: Financial hurdles like student loans and a tough job market have made it difficult for millennials to own their own homes. Instead of trying for a bank loan, some are choosing to take private loans from their parents or other family members instead.
- People with Bad Credit: Private lending is not usually recommended for long-term investors who wish to buy a home and stay in it. However, if you are unable to qualify for a traditional loan due to bad credit or any other reason, it might be worth looking into until you are able to refinance.
Spelling Out the Terms
No matter who you decide to borrow from, whether it’s a close family member or a complete stranger, you’re going to need to set the terms. There are no standard terms or loan amounts – every situation is unique. While this offers you the benefit of flexibility, it also means that you’ll need to be extra careful to make sure every
The transaction will include a promissory note and a mortgage. A promissory note sets the terms of the mortgage, including interest rates and how long the borrower has to repay. The mortgage is used as collateral to protect the lender’s interests – should the borrower fail to pay, the lender has the right to take over the property.
Some lenders may require you to buy insurance. For rehab properties, especially those with a history of foreclosure, many lenders will recommend title insurance. Title insurance protects your investment from title claims and boundary disputes.
If you don’t put at least 20% down on a property, you may also be required to pay for private mortgage insurance. This protects the lender in the case that the borrower is unable to pay. The cost of this insurance varies, but the general rule is that the less you’re able to put on a down payment, the higher the cost will be.
Payments made on a traditional mortgage are reported to the credit bureaus – private mortgage payments are not. If you decide to go with this type of loan, you’ll need to take a few extra steps to make sure that your positive mortgage activity is going toward raising your credit score.
Your lender is the one who will need to report the payments. They can either do this directly or through a third-party, such as a loan servicing company. Third party services charge a fee, which typically falls between $10 and $20 per month. In most cases, this small monthly fee is preferable to direct reporting, which involves strict business criteria a private lender may not be privy to.
Once you’ve established a reporting method, you’ll be able to use your new property to build credit.
Qualities of Good Private Lenders
Choosing an investor to finance your real estate project can feel like a gamble. But instead of treating it like a game of chance, it’s more helpful to see it as a matchmaking game. You’re looking for an investor that can give you the funding you need at the lowest interest rate possible. Your future investor is looking for a borrower they can rely on to pay off their loan on time. When the right match is made, everybody wins.
So how do you find that perfect investor/borrower relationship? Whether you choose to borrow from a friend, family member, or through a mortgage lending company, you’ll want to make sure they have the following qualities:
- Experience: It’s probably not surprising that a first-time investor is going to be more prone to mistakes than someone with years of experience. That’s why loans from family members are so prone to issues. In many cases, they simply don’t have the financial background to make a good deal that is legally sound.
- Reputation: Due to the risk of fraud, you want to be sure that the lender you choose has a solid reputation. Whether it’s referrals from people you trust or the endorsement of a established group of private mortgage lenders in Florida, you should be assured of their credibility.
- Responsive: Communication is key. You should be able to easily get ahold of your investor, whether it’s through email, phone, text, or regular in-person meetings.
- Detailed: A good investor should be willing to work with you to create a detailed loan agreement. The more thorough this document is, the more prepared you will be for any potential curveballs.
Why Use a Lending Company?
Wait, isn’t the point of peer-to-peer lending to cut out the middleman and simplify the process? Why get a private mortgage lending business involved?
As we mentioned at the beginning of this guide, finding a compatible investor on your own can be difficult and time-consuming. A local mortgage loan company can significantly speed up the process. But that’s not the only reason going through a mortgage lending company is the best route. It can also help you protect your personal relationships as well as your personal information.
Borrowing from a friend of family member might seem like a good idea at first. You already have a relationship of mutual trust, and they probably won’t charge you a very high interest rate. But if something happens and you suddenly become unable to pay them back, it can create tension and stress in your personal life. Plus, someone borrowing from their parents may be more likely to miss payments because they know that mom and dad aren’t going to foreclose on them.
Trying to find a private lender on the wild west of the internet comes with risks, too. While you will need to disclose some personal information to a lender, such as income and credit history, be wary of those that ask for more sensitive information like your social security number. That’s not really something you want to give out to a stranger on Craigslist.
At Associates Home Loan of Florida Inc., we guarantee a speedy and safe funding process. We’ll match you with an investor from our large and varied pool of private lenders in Florida. Using our experience and understanding of mortgage finance, our goal is to create a win-win solution for both the lender and the borrower.
When applying for a traditional mortgage feels like an uphill battle, a private mortgage might be the alternative loan solution you’re looking for. With the right lender/borrower relationship and a detailed agreement in place, your venture is sure to be a success.
Looking for reputable private lenders in Florida? Associates Home Loan of Florida Inc. works one on one with Tampa residents to pair you with the perfect loan solution to meet your individual needs. Whether that’s a private mortgage loan, a hard money loan, or other nontraditional loan for bad credit, the home loan professionals at Associates Home Loan of Florida, Inc., will help you obtain the right mortgage financing.
If you’re interested in applying, the process is quick, private, and hassle-free – no SSN or credit check is required. Fill out a form online or call us for immediate service to get started!