When buying a home in the real estate market, you need to have a down payment, get pre-approved for a mortgage, and work with a mortgage broker. As you go through these steps, there is a good chance that you will be faced with the reality that you can’t get the mortgage loan to buy the house you want so badly. That is where the choice between a bank mortgage and a private lender comes into play. Financing is necessary in order to fulfill your dreams, and you must identify the best options available. Keep reading to discover the pros and cons of private mortgage lenders and banks.
What is the difference between a private mortgage lender and a bank?
Within the mortgage industry, the only similarity between banks and mortgage companies is that they provide the funds you need based on your scores. These scores are based on criteria such as credit scores, income, and debt.
As for the differences between banks and private mortgage lenders, both come with advantages and disadvantages depending on how you view the services they offer. For example:
- Private lenders offer a wide variety of loan types and can even customize them. They have fairly lax credit criteria. Also, after closing, they can sell your mortgage loan to another lender.
- Banks have fewer loan options and very strict qualification criteria. You will be paying them and working with them throughout the loan period.
Private lenders base their selection on the value and marketability of your property rather than your credit score and financial history.
Mortgages from private lenders typically have higher interest rates intended to offset the additional threat of lending to someone who does not qualify for a standard mortgage. The interest rate on the loan can range from 10% to 18%.
While many traditional mortgage types include fees, private mortgages have higher borrowing costs than the norm. Costs range from 1% to 3% of the total mortgage amount.
Most private lenders offer mortgage terms ranging from one to three years or more. Private lenders are often used as a bridge loan to a longer-term bank mortgage.
Why are private lenders better than banks?
Working with a private lender rather than a traditional lender has a number of benefits.
Different lending options
Since lenders are not subject to the same rules and regulations as banks, they provide a range of alternative loans. The more loan product options, the more they can be tailored to your needs. Private lenders have extensive experience in the industry and will happily provide financial advice and explain in depth the terms and conditions of each type of loan to determine which type of mortgage is best for you.
Get your money faster
Lenders provide money much faster than banks. A traditional mortgage lender takes weeks to approve your loan and weeks to give you the money. In contrast, a mortgage lender acquires the money faster, which means the difference between accepting or rejecting your offer on a property. Remember, banks are all about bureaucratic procedures.
Private mortgage lenders adapt to your financial situation and your specific needs. They are willing to arrange the terms of the loan application to meet your financial goals. A bank will not even give you a chance for a conventional loan if you have bad credit. A private lender will find a way to work with you to design a mutually beneficial strategy that will provide you with the financing you need to buy a home.
Millions of people trust banks. That’s why they will treat you like just another number without understanding your needs. Private lenders consider getting to know each individual to make the experience more personal.
How does private lending work?
The fact that the funding money is given by a private person or organization is what defines a private loan. Often, the lender is a family member or acquaintance of the borrower. When a private money lender is a business, it’s not a traditional bank or a registered lending institution.
Private money lending is not governed by the same rules as other lenders, although it’s not entirely unregulated. Private money lenders must comply with state usury regulations, which limit the amount of interest they charge. They may also have restrictions on the number of loans they make.
A private money loan is not the same as a standard loan. The lender is likely to be concerned about whether a particular contract makes financial sense, as well as the borrower’s credit history or credit score.
Private money loans often have short terms on monthly mortgage payments but can also be paid over a longer period. They often require a down payment, which is usually secured by the property, as well as an application process. It is customary for the lender to require a written plan outlining how the funds will be spent.
How to choose a private lender
Dealing with the right private lender is similar to working with a traditional loan. Private lenders will work with you to get the right mortgage loan. If you are still unsure of the type of lender to choose, consider the following:
You should ask your lender a lot of questions to make sure you fully understand the terms of the mortgage. A private lender can help clarify and alleviate some of your concerns about loan rates.
Read online reviews to make sure you choose the best private lender for your mortgage needs. Know your investment portfolio and what you can and cannot tolerate when choosing the type of loan. If you do this, the private lender you select will be happy to work with you as well.
No matter who you borrow from, a mortgage involves fees and penalties. Before you make your choice, it’s essential to have a thorough understanding of the fees involved. All lenders, whether private or institutional, have their own set of fees, so don’t choose one unless you’re comfortable with what they offer.
When comparing different types of mortgage lenders, here are some things to look for and questions to ask:
- How much are the monthly payments?
- What is the current interest rate?
- What happens if I can’t pay the mortgage?
- How is the mortgage amount calculated?
- What is the cost to get out of the mortgage if necessary?
- Is there a prepayment option?
- What are the penalties for prepayments?
Private lending services
A private lender is an individual investor or non-bank financial institution that makes loans without requiring monetary deposits from consumers. Private lenders may be businesses or individuals.
Private lending companies include the following:
- Financial technology or fintech organizations
- Companies specializing in private equity lending
- Companies that provide venture capital
- Hedge fund managers
- Companies that help companies grow
- Investment managers
- Real estate investment
A private lender is someone who lends money to individuals or businesses. Private lenders include those listed below:
- Venture capitalist
- Private equity investor
- Angel investor
- Private-to-private lending
- Retail investor
- Real estate investor
If you wish to get a mortgage, it’s best to work alongside a trustworthy company. If you have financial problems, Refinancement Hypothecaire’s financial advisors are prepared to guide you through different alternatives. Our team of experts can guide you through the entire loan process to make sure you get the best deal available with fair interest rates and minimal additional fees. Contact us today to learn more about our services!