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What Are Private Lenders? Private Lenders vs. Bank Mortgages

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November 13, 2023

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Are you ready to buy a new home but can’t get through the strict lending requirements of a conventional mortgage? Or maybe you’re a self-employed entrepreneur, have less than stellar credit, or are venturing into real estate investing. What can private lenders do to help you out?

A private lender can give you a range of options and be a viable pathway to home ownership. Learn more about this alternative and weigh the benefits of a private lender vs. a bank mortgage.

What Are Private Lenders?

Simply put, a private lender is an individual or organization that loans money to others but is not an institutional financier, such as a bank or credit union. A private lender, such as Associates Home Loan, often assists people who do not qualify for a conventional mortgage or folks who would rather not use a traditional institution.

Who Can Be a Private Lender?

Legally, anyone with enough capital can be a private lender. However, once an entity begins to offer loans of a certain size, it must follow the regulations of the state where it operates.

For example, Florida has statutes as a safeguard to ensure loans don’t have too high of an interest rate or that a lender does not misclassify a home loan. Always ensure you work with a reputable lender that follows applicable laws.

What Are the Different Types of Private Lenders?

Private lenders often specialize in different areas, though some companies provide multiple products. These include:

  • Industry-specific financing: Financial packages that meet the needs of a particular type of business
  • Merchant cash advances: Upfront cash to a company on the basis of projected credit or debit card sales
  • Peer-to-peer platforms: Programs where many smaller investors pool their money to offer loans, with a fee to both the lenders and borrowers
  • Invoice factoring: Capital that a company receives in exchange for unpaid invoices
  • Real estate loans: A nontraditional loan for residential and commercial properties

Because of the unique nature of home loans, it’s usually best to work with a private mortgage lender that focuses primarily on these products.

Loans From a Private Lender vs. Bank Mortgage: How Do They Differ?

Bank mortgages have been the standard option for home loans for so long that people often forget about the alternatives. Consider how the two compare.

How Private Lending Works

You won’t find the process of applying for a non-traditional loan much different than a conventional loan. In fact, it’s usually a bit easier.

A loan officer works with you along the way through the application and prequalification process. You’ll likely have to provide basic documentation about your income, existing debt, and credit rating. Prepare to also provide a down payment to qualify for better terms.

You should arrange financing before you make an offer on a house. Once you know the property you want to buy, get a proof of funds letter from your loan agent so you can begin negotiations with the seller in earnest.

How a Bank Mortgage Works

The bank mortgage process is similar to a private loan except for:

  • Usually slower processing
  • More detailed background and credit checks
  • Stricter industry regulations that restrict flexibility with nontraditional borrowers

Also, while banks can have lower interest rates, these may or may not make a loan less costly or more convenient, depending on the terms.

What Are the Benefits of Working with Private Lenders?

Bloomberg recently reported that the private lending industry continues to grow at a record-breaking rate. The following advantages show why more people prefer them.

Flexible Lending

Anyone can go through a tough time that dings their credit. Banks may not be willing or able to adjust terms to meet your needs, but private lenders have the freedom and eagerness to tailor terms to most borrowers.

A Greater Variety of Products

Banks focus their home loans on what they consider should be the circumstances for the average American. Realistically, though, no two borrowers are the same, and loan products should have a similar variety to meet your unique needs. Fortunately, a private lender can do just that.

A Better Understanding of Risk

Once again, banks take a narrow view of risk because of the strict regulations they must follow. Private lenders can get funding from multiple sources and can be more practical about calculating risk to create workable terms.

Access to Shorter Repayment Periods

Banks tend to only offer 15- or 30-year home loans, but a private lender can create shorter repayment periods. This option is great if you want to flip a house or know you won’t be in a starter home for long.

Less Paperwork

You’ll have a much less stringent documentation process with a private lender. You can likely even finish the process more quickly as well.

Forward-Thinking Lenders

Noninstitutional lenders aren’t stuck in the old ways of doing things. Nor do they have to wait as long for bureaucracy to allow them to offer new loan products that fit the circumstances of the modern market. Private lenders want to do business and are ready to meet your needs.

How Can You Choose the Right Private Lender?

Make sure you work with the right lender by checking the following qualifications.

Experience and Specialization

The most reliable lenders have many years in business and belong to well-known professional associations. Homebuyers, in particular, should look for a lender that understands the nuances of the housing market and has the appropriate licensing.

Reputation

Find out how easy it is to work with your prospective lender. Check reviews and testimonials that demonstrate the company wants to be your partner in the home-buying process and not just a financier.

Flexibility

Verify that the lender has more than one loan type and works with different types of borrowers. You might find that the loan you originally wanted is not the right fit for you. Your private lending institution should be able to help you examine and understand other options.

Terms, Rates, and Fees

Determine that the lender is fair. All lenders need to charge fees and interest to stay in business but talk with your loan officer to see how the terms and rates compare with others on the market.

Work With a Private Lender Ready to Serve You

Just because you don’t have “conventional” circumstances doesn’t mean you have to sit out of the housing market. Talk to one of our helpful brokers at Associates Home Loan of Florida to learn more about how private lending can help you fulfill your home ownership dreams.

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