If you are considering working with a private lender, it is important to do your homework. To start with, you have to find out about the cost of any lender’s fees, their interest rate, your down payment options, and the length of the term. Ensure the mortgage specialist you are planning to use a fully licensed private lender, and also make sure you consult your real estate lawyers before you proceed with your loan application and sign any contract.
Even though this form of private lending isn’t always the most lucrative business idea, it definitely dwarfs what’s offered by traditional banks, particularly when serving people with a bad credit score. Private loans are generally for smaller to mid-sized real estate projects of a few to numerous stories. The benefit is there’s less red tape and that lenders don’t have to deal with the numerous factors considered by mainstream lenders such as banks.
When attempting to procure a small commercial real estate loan from a private lender, several factors are considered. Usually, this process doesn’t happen on a formal request; rather, it will be something initiated by the real estate developer or construction pro. The first step involves determining the value of the property. The value will be determined by a method of deducting what is owed on the mortgage. This will leave an appraiser with a final value.
The second step is determining how much of the appraised value is feasible to be purchased in cash. This may entail digging into the back value of the property and looking to see if there are any other intangibles. An example of this would be the age of the property or the type of materials and/or equipment used. The third step will be to look at the borrower.
This includes a financial history that may include credit reports, a net worth statements from any existing property, type of employment, etc. Also, lenders love a solid partner to take on the loan with them.
Benefits of using private lenders
While there are lots of mortgage lenders out there, including traditional mortgage lenders, local credit unions, and even private mortgage lenders, it is imperative you know the benefits of using a private mortgage. Below are some of the advantages of choosing a private mortgage lender over traditional banks.
It is excellent for beginners
For starters, a mortgage loan from a private institution is a great starting point. These loans allow us to start our lives by making sure we make these purchases and investments and, in turn, fulfill our dreams as we don’t all start with lots of money or properties to our name. Private lenders allow us to take risks, and fir beginners, getting a mortgage loan from a private lender will make them establish themselves and move onto other investments.
There is less paperwork.
This is one of the most apparent benefits of a private mortgage. Unlike traditional banks that have very strict criteria for borrowers, private mortgage lenders have fewer paper works, borrower qualifications, and underwriting criteria and would get you a loan even if you do not have a W2 form or you lack a steady work history.
It’s easier to qualify.
Not everyone has a high credit score. This is because it takes time to build one or even bounce back if it reduces. These financial negatives hinder you from getting a mortgage loan from traditional banks, as there is a high chance you could be turned down.
Unlike traditional banks, credit history, reports, and poor credit score might not matter so much because they can secure collateral somewhere else. Private lenders are known to take risks because they are flexible in choosing their beneficiaries.
While traditional banks have to follow the strict, slow process for mortgage loans, which is stressful and time-consuming, private lenders aren’t guarded by these regulations and don’t have to waste your time. Private mortgage lenders allow a faster process in helping you secure your loan. Loan deals with private firms can even be executed more efficiently if you’ve already worked with them before because they already know your history and have a relationship with you.
How much do private mortgage lenders charge?
Most private lenders do not charge any broker fee upfront before funding a loan. But we’ve seen some private lenders charge some fees before funding. Some of the types of loan fees that some private lenders charge before funding short-term loan deals are as follows.
Many private mortgage lenders do not request an appraisal fee before funding your mortgage loan, but there are some who do. If required, the appraisal fee is typically directed to the appraiser.
Site visit fee
A private mortgage lender will typically visit every property they fund and meet with the borrowers as well. Some lenders charge some sort of fee for their time and travel. While some private lenders charge their clients for the site visit fee, most lenders that need appraisal don’t have to perform a site visit. The site visit fee ranges from $500 to $2500, depending on the firm.
Deposits are more common to traditional banks and other large financial institutions. But we’ve seen private mortgage lenders who request a deposit for a mortgage loan. Most lenders who do this just decide they want a sort of commitment from the borrower. This makes sense in a way because it would be a great loss for the lender should the borrower decide to back out of the deal after spending a lot of time and effort to complete the funding process.
That being said, the mortgage rate you should expect on a private loan can range from 10% to 18%, depending on the property.
In conclusion, this brief overview of private money lending provides insight into a viable and viable way for investors who have the capacity, funds, and willingness to participate. It is often not considered a viable alternative to conventional lending, it can still be utilized efficiently to obtain a small business loan, mortgage loans, and more.