Private Mortgage Dangers
In the mid-to-late 2000s in the United States and much of the free world, the requirements to obtain a home loan or mortgage had been significantly relaxed. Since the mortgage crash of 2008; however, the rules to obtain a publicly backed mortgage have significantly increased to the point that many consumers find it difficult to obtain a home or property loan. As a result, the private mortgage industry has seen a “mini-boom” in providing home loans to both consumers with strong credit as well as though who may have “less-than-desirable” credit ratings or foreclosures on their record. Although private mortgages service this critical need in the industry, there are several private mortgage dangers worth looking out for before signing the bottom line on a private note for your own home.
How Does a Private Mortgage Work?
As mentioned, a private mortgage is an alternative to obtaining a traditional home loan. Instead of going to your local bank to finance the mortgage, they are provided by either companies or individuals who lend money to consumers for home purchases as an investment. Many times, a private mortgage firm will do business with several mortgage brokers who recommend their services to clientele seeking out both traditional and alternative mortgage options. Once obtained, the private loan is very similar to a traditional note but may have different terms. These include but are not limited to: being required to pay for private mortgage insurance if you don’t have 10 or 20% of the loan value available in capital funds when closing the loan, potentially having to pay a balloon payment during the life of the loan, and other legal differences from publicly backed notes.
Private Mortgage Dangers
1 – Requiring a “Good Faith” Payment Before Closing
A common scam encountered in the private mortgage market is requiring the consumer to make a “good faith” payment before closing on the note. The typical “promise” by many of the scam companies is that they require this payment to do an “underwriting test” on the individual’s credit to see if he or she is worthy of the loan. This is likely a trick or scam to get a large payment from you that may never actually be used towards the property and is just asking for trouble.
2 – Thinking You Can’t Qualify for a Publicly Backed Mortgage
Several private mortgage lenders will try to play on consumers’ fear that they can’t qualify for a publicly backed mortgage and try to convince them not to do so. Many times, this fear on the part of the consumer can be unfounded. In reality, many individuals would qualify for a publicly backed note now that the market is showing signs of recovery; albeit, it may be at a higher rate than those being advertised. It’s worth checking; however, as the costs associated with a publicly backed loan with a slightly higher rate may be equivalent to those you get back from private mortgage loan quotes.
3 – Not Knowing what to Expect with a Private Mortgage
A private mortgage isn’t free money. At best, you are going to obtain a home loan that is equivalent to what you were used to qualifying for several years ago. At worst, you are going to run into individuals or a company who just want to make more money off of you than a bank would on the loan! Make sure you know what you are getting into with the loan. The worse your credit score, the higher the interest or fees you should expect to pay. Not that this is a bad thing, but just something to keep in mind when shopping for private loans for your own home.
4 – Not Hiring a Lawyer to Review the Loan
Another common danger with private mortgages is relying on the lending company or individual’s lawyer to prepare and review the loan documents. In most locations in the United States, it should only cost you a few hundred dollars to retain a local real estate attorney to take a look at your private loan paperwork BEFORE YOU SIGN IT! This is a small price to pay compared to the potential of being out thousands of dollars if the loan is a scam or the potential long-term damage that scammers can do to your credit if you sign up for a less-than-legitimate loan. Always be aware of the advantages and disadvantages when venturing into Private Mortgages.