Learn About Private Lenders For Home Loans
There is often confusion over the term private money lender. Let's start off with defining a private loan, which is one in which a private individual, investment group, partnership or investment trust finances or funds a loan. This differs from a traditional loan, which is funded or financed by a bank, commercial company or institutional lender. Private money loans are also known as hard money loans or bad credit loans and are common in financially difficult times.
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Who Are Private Hard Money Lenders?
Private hard money mortgage lender are individuals, groups, funds or trusts that lend out money to individual borrowers or to companies and businesses in search of fast funding. They may also fund loans that are high risk and have been turned down by traditional lenders. Private lenders are sometimes known as a last resort lender because they will fund mortgage or residential loans that have been through all the various loan channels without success. Private money lending is a unique subset of the mortgage world and constitutes a small percentage of home loans.
Who Seeks a Private Loan?
Private mortgage loans are often sought after by borrowers with the following circumstances. The first is anyone who is currently facing foreclosure or individuals who are late on their mortgage payments and are worried about a notice of default against them. Other hard money borrowers include those who have been unsuccessful in obtaining a home equity, debt consolidation or mortgage refinance loan. In addition, a private loan may be ideal for construction loans or for deals that involve commercial property, investment property or raw land deals. Finally, any borrower who, for whatever reason, needs to close on their loan very quickly. Private mortgage loans may close in as fast as 7 days.
Private Money Lender Rates
Private loans carry higher interest rates than traditional home mortgage loans. Borrowers should expect to add several percentage rate points onto the highest mortgage rate available through a traditional lender. Borrowers should therefore explore traditional loans options prior to soliciting a hard money loan.
Long Term Effects of Private Money Loans
The best case scenario of private hard money loans is to obtain the loan and, during the loan term, raise your credit score. Once the borrower’s FICO is above 520, they are eligible for a subprime loan, which carries a lower interest rate. After this loan, a borrower nay then qualify for a traditional type loan with more reasonable interest rates and terms. Private lenders may carry prepayment penalties of up to 3% for the first year, 2% during the second year, and 1% third year. As with all other terms, this is negotiable.