Not all mortgages are obtained through a bank or credit union. With a hard money loan, money is borrowed from a person or business rather than a financial institution. A private mortgage is a legally binding agreement between two parties. This can be between two individuals or an individual and a business. While there are several risks to taking out a private money loan, problems can easily be avoided with clear planning and simple documentation.
Many times, private money or hard money loans, is a great solution for borrowers who have been turned down by financial institutions. Many borrowers over the last few years have found it difficult to obtain a mortgage due to strict guidelines set forth by major lenders. Typically, hard money loans have been used by investors to secure properties, but more and more home owners are now borrowing from private lenders.
Private money loans can be a good alternative for home buyers who aren’t able to qualify for conventional mortgages because of bad credit or high debt. It can also be a good choice for home buyers who are self-employed or may have difficulty providing documentation for a steady income. The underwriting for these loans is usually more focused on the property, so even borrowers with bad credit can obtain a private mortgage if the lender deems the project profitable.
Homes that are in in need of major renovations or are in serious disrepair often do not qualify for a conventional loan, even if the buyer has great credit. Hard money loans are a good option in these cases.
The approval process for private money loans takes only a few weeks, whereas conventional mortgages may take up to 45 days. Some home buyers consider this an even trade off for higher interest rates.
Great for investors. While private money loans are typically shorter than other loans, this may be of use for flippers who plan to sell the property quickly. It’s also a great option for investors who plan on getting a conventional mortgage down the road.
Interest rates on private mortgage home loans have historically had higher rates than conventional mortgages. Since private lenders do not require good credit, the rates are sometimes twice that of the typical 30-year fixed mortgage, usually between 10% and 20% percent.
Lenders for hard money loans allow much lower LTV (loan-to-value) ratios than financial institutions, usually around 65%. This means that borrowers must make a large down payment with a minimum of 25-35% to purchase a home. It is also unlikely that borrowers will be eligible to receive tax deductions offered by traditional loans.
Private loans are usually not paid back over 15 or 30 years as with traditional mortgages. Most hard money lenders want the loan to be repaid within six to twelve months, sometimes going up to a few years. Many home buyers do not use private lenders for this reason. On the other hand, investors often use private money loans when flipping a house.