Are you considering buying a property and still have problems with securing a loan? What you need is a private mortgage lender. Private lenders are aware that the lending guidelines used by banks and other lenders are not favorable. This is true, even for people who can pay back the loan.
However, if traditional lenders have turned you down for any reason, you can turn to private lenders. They will look beyond your credit history and ensure that you get the needed funds and fast too!
What Is a Private Mortgage?
A private mortgage is a type of mortgage loan that is financed through private sources such a business, friends, or family members rather than through a conventional mortgage lender. It comes in handy for people struggling to get a mortgage loan the traditional way.
Additionally, the loan is issued for a short term, usually between 1 to 3 years. During that period, the borrower will only pay the interest for each month, an annual rate of 10 to 18%. These payments are not cheap, but the loan comes in handy for people who do not qualify for prime lending or have bad credit history. You can visit geoffleemortgage.com/mortgage-services/private-mortgages/ to find out why a private mortgage is right for you.
What is the Difference Between a Private Mortgage and a Traditional Mortgage?
Here are the differences between a private mortgage and a traditional mortgage:
One of the major differences between both forms of lending is the criteria that a borrower needs to meet to be eligible to get funds. Banks are usually critical about the financial profile of a borrower. The process also requires several documentation, verifications, and a good credit score to ensure that you can afford to pay back the monthly interests, a down payment, the upfront costs, and other related fees.
On the other hand, private lenders do not bother about the credit score of the borrower. They are willing to do business with you as long as you have a minimum of 20% to commit to the purchase of the property, the required capital to pay the interest on the loan, and a solid plan on how you plan to pay back the loan.
2. The Time Frame
When investing in a property, time is a very crucial factor. It can take several weeks or months to get a traditional mortgage loan. But it will take about one or two weeks or even less to get a loan from private lenders.
3. The Interest Rate
A traditional mortgage usually has some of the best interest rates in the market. But private mortgages have interest rates of about 10 to 18%. This is due to the fact that people resort to private lending when they are unable to secure loans from traditional lenders. So, they have to pay more as high-risk borrowers.
4. The Type of Property
A traditional mortgage is given to people who want to secure a residential property for single or multiple families. However, this type of property must be one that does not require remodeling or refurbishing.
Private lenders, on the other hand, give loans for both residential and commercial properties. They specialize in distressed properties that banks will not approve of. However, you need to note that private mortgage loans are basically issued on non-owner-occupied properties.
How to Calculate a Private Mortgage
Let’s see an example of how you can calculate a private mortgage.
John Smith needs to borrow $500,000 to purchase a property that the traditional mortgage lenders will not approve of. However, a private mortgage lender decides to give him the money. So, John borrows the $500,000 at an interest rate of 10% over a period of 2 years (assuming there was no setup fee or broker’s commission).
Since private mortgages are interest-only, the payment will be calculated thus:
10% / 100 = 0.1
Monthly interest: 0.1 / 12 months = 0.00833
Payment per month: $500,000 x 0.00833 = $4,165
Interest during the borrowing period: $4,165 x 24 month = $99,960
So, at the end of the second year, John will pay almost $100,000 in interest to the private lender. Assuming everything works out fine, he can try to transfer the $500,000 private mortgage to a traditional lender. That way, he can start paying back the principal.
How to Qualify for a Private Mortgage
Due to the fact that private mortgage is risky for the lender, there are restrictions and guidelines for borrowing. A private lender needs to do a lot of research to know whether you are a good borrower or not. In order to qualify for a private mortgage, you need to have the following items:
1. A Valuable Property
The lender needs you to provide proof that you have valuable property. In case you default on your payment, the property will be sold to pay the debt. Hence, the property has to be in a good condition and sited in a choice area.
2. Income Verification
You have to confirm that you have a source of income. But if you are self-employed, this may not be possible. However, you can provide an estimate and other documents to support your claim.
3. A Down Payment
The least down payment you can make if you are buying a new property is 15% of the cost price.
How You Can Find Private Lenders for Real Estate
If you are new to the real estate business, you may be wondering how your colleagues find private investors to fund real estate deals. These investors often use private lenders to fund their properties. Now, there are several private lenders but how can you find one that will be willing to close a deal with you?
Having the right mindset and being prepared will help you in your search. Below are the steps to take when trying to find a private lender for real estate.
1. Understand the Basics of Real Estate Private Loans
When you are starting out, some financial terms may be a bit confusing. You may be wondering if hard money lenders are the same as private lenders. Well, they are almost the same.
Hard money lenders have affiliations with traditional financial institutions, but their requirements are less strict (which means that you will pay more in interest rates). Private lenders are not affiliated with traditional financial institutions, but both sources are private money. However, you need to be able to distinguish between the two sources.
Additionally, you need to know the kind of information that a private lender will require. In most cases, the private lender will be experienced in real estate investment. Hence, they know exactly the figures and areas to look at when you present your proposal.
Although it is important to have a good relationship with the lender, you need to be well prepared to give answers to questions concerning the facts of a deal. The following are some questions to expect from a real estate private lender:
- Can you pay back the loan?
- Is there any incentive to invest?
- Are there risks involved in the investment?
- How will the investment be secured?
- Do you have a well-researched plan, and is it achievable?
2. Build a Good Network
Getting a loan from a private lender is very different from trying to get it from a bank or even a hard money lender. You need to develop a good investor network when working with private lenders. You can start building this network in two ways.
First, know the industry professionals such as fellow investors, real estate agents, attorneys, private investors, and title companies. Most private lenders are gotten through referrals from people in your real estate network.
Second, you can build a list of contacts from people who are outside the real estate industry. This includes colleagues, friends, family, and anyone who’s not an investor but may be seeking new opportunities. Some of your colleagues and friends may have some valuable connections that you may need for your real estate business.
You may want to read about how to build a real estate network here. Remember to always approach your potential connections with respect. Also, it takes some time to build good relationships with professionals in the real estate industry. But when those relationships are established, a lot of doors will be opened to your career. And having a good investment network is important in helping you to find a reliable private lender to work with.
3. Prepare a Good Proposal
Your proposal can include an overview of your company, which contains information about your education, goals, previous deals, and experiences, and why the private lender needs to invest in your business. You also need to prepare a video or a presentation that outlines the previous properties you’ve worked with. This will outline how successful your past deals were.
It is important to include pictures, figures, and other relevant information. You don’t have to outline every property you have handled, just select from your best works. Remember that you have to make a good first impression and talk more about your strengths.
Furthermore, you need to understand what private investors look out for before investing. Look at the documents you intend to present with the eye of an investor such as insurance and promissory note. Write down vital information such as the duration of the project, when the investor should expect the loan to be repaid, and what will happen if multiple investors are interested. This will help you to be prepared when pitching.
4. Select a Private Lender
It can be quite tough when you set out to find a private lender, but you need to understand that it works in two ways. You will spend some time trying to pitch to potential investors and making sure that they are impressed, but you also need to be sure that the private lender will meet your needs, satisfactorily.
You need to find out about their loan term and the interest rate as well as the basis for the loan. This information will enable you to determine how long it will take you to repay the loan. Also, you need to know if they give loans based on the current value of the property or its value after it has been remodeled.
Furthermore, ensure to enquire about the lender’s schedule for disbursing the fund to you. When you have all of this information, you will be confident when choosing a private loan that will not be a huge risk to you.
5. Make Your Pitch
This is the point where you will pitch your proposal and explain your numbers and things the investor needs to know about the property. Do not go for a fast deal or a quick sale; it may not work. Focus on giving answers to the investor’s questions especially those related to timelines and profit splits. You can find useful tips on pitching to investors in this article here: https://neilpatel.com/blog/pitch-to-investors/.
A private mortgage is usually the last resort for people who do not qualify for prime lending or loans due to bad credit. So, if you need a quick loan and can afford to pay a high interest rate, a private mortgage can be a great way to purchase a property or invest in something bigger.