The Pros and Cons of Private Mortgage Lenders

You want to buy an apartment building and turn it into a hotel. Or maybe you want to launch a new commercial real estate project. However, your credit history is far from stellar, and you need cash as soon as possible. Getting approved for a traditional loan is difficult and takes a lot of time. If this is you, a private mortgage is an ideal solution.

What Is a Private Mortgage?

Private mortgages are financial agreements between borrowers and private money lenders for real estate. Private mortgages provide cash for borrowers who want to launch a new real estate project. Also known as private money home loans, these loans are often offered to family, friends, or other close individuals. Private mortgage lenders also provide loans to individuals and companies who cannot get approval from conventional lenders. These individuals prefer private loans because they don’t qualify for a mortgage or want to avoid the red tape associated with traditional lenders. The loan is very similar to a regular mortgage – the borrower pays back the loan in periodic payments, plus the interest, in an agreed-upon period. Like conventional mortgages, the lender has a lien on your property, which can be foreclosed if you default.

Mortgage Lenders vs Banks – What’s The Difference?

Mortgages offered by banks or mortgage lenders follow strict guidelines, criteria, and various rules (most of them imposed by the federal government). The rules and guidelines are designed to protect both the borrower and the lender, especially during difficult moments, and borrowers have to meet them to get the loan. On the other hand, private loans don’t adhere to federal regulations. They create their own rules and qualification requirements. Of course, this makes them more risky and expensive, but you’ll get approved faster.

Pros And Cons of Private Mortgage Lenders

Private mortgage lenders don’t follow the strict federal government rules on mortgages. This is the main reason why a person may look into private money home loans. These loans are excellent for people who have a hard time qualifying for a conventional mortgage. However, the loans are riskier.

Let’s take a look at the main pros and cons:

Pros:

  • it’s easier to qualify – private mortgage lenders follow their own rules and often lend to people with a lower credit score or poor credit history; they also allow for a smaller down payment; in some cases, they don’t need private mortgage insurance, making the qualification process much quicker; because of this, private mortgages are excellent alternatives for medium-sized real estate developers
  • shorter approval process – with private mortgages, you get to the closing table much faster; there are fewer documents, approvals, processes, appraisals, and inspections;
  • more flexibility – private lenders are more open to negotiation than banks; they can create a more flexible payment plan, offer better interest rates, or waive some of the fees;

Cons:

  • shorter loan terms – private lenders have shorter loan terms than banks (less than the typical 30 years); this means your monthly payments will be higher;
  • there are fewer protection mechanisms – private money lenders don’t follow the strict federal government rules; this means that if you encounter financial problems, you won’t have a safety net;

Are you interested in a private mortgage for your new commercial real estate project? Click here to find the best private mortgage companies near me!

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