What is a Private Mortgage?
Private mortgages have been in existence for a while; however, since United States banks and traditional mortgage lenders have tightened up their lending criteria following the 2008 mortgage crisis, they have become an increasingly popular option for consumers. A private mortgage is popular with two types of people: 1 – Those who are having trouble qualifying for a traditional mortgage, and 2 – Those who desire a quicker turnaround time or potentially better financing on the property in question. These mortgages aren’t just for home buyers though, as investing in companies who specialize in private mortgages has also become more popular.
How Do Private Mortgages Work?
In today’s home buying environment, private mortgage options are commonly being touted as an alternative to going through a traditional bank or mortgage company by mortgage brokers. Besides providing homeownership opportunities to those who can’t qualify for traditional loans in the more strict regulatory environment, they also help consumers avoid many of the predatory lending tricks found in the marketplace. One of the easiest methods to locate potential private mortgage lenders in the United States is to leverage a mortgage broker who includes private mortgage companies in their available listings of lenders. Once this type of mortgage is obtained and closed, it works very similarly to a traditional note. Lenders will need to read all of the “Small Print” when obtaining a private loan, since some lenders may have slightly different requirements than traditional mortgage companies with regards to pre-payment penalties and interest payments.
Private Mortgage Dangers
Although private mortgages provide the opportunity to individuals to own a home who may be currently shut out of the mortgage market, they are not without danger. Similar to other industries, the private mortgage industry does have its shady cast of characters who prey on those who are extremely desperate to get into a note. Since private notes have increased in popularity, some of the “less-than-desirable” companies have started advertising their loans on late-night infomercials, junk mail, and email spam. Although these opportunities “could” be legitimate, consumers must read the fine print on the actual interest rate to be paid, repayment terms, early payment penalties, and hidden balloon payments when dealing with a private mortgage company on their own. Although a mortgage broker can provide a layer of security, it is still important to have all details of the loan explained to you and demonstrated in the mortgage contract before agreeing to terms.
Do Private Mortgage Companies Require PMI?
Yes, most private mortgages will require PMI on new loans when the consumer cannot meet loan-to-value ratio requirements. The exact percentage of a down payment will vary on a private mortgage depending on the lending company; however, it will normally be between 10 and 20 percent of the total amount of the mortgage. It’s also important for individuals to understand the terms for eliminating payment of PMI once there is sufficient equity in the home or property being financed before closing on a private mortgage.
Advantages and Disadvantages of a Private Mortgage for Borrowers
The primary advantage of a private mortgage for consumers is that the note can be obtained from just about anyone with sufficient capital to underwrite the note. As a result, the terms of a private mortgage can be significantly more flexible than those underwritten by the Federal Government or VA. Private notes have become more popular amongst family members in addition to companies providing the loans since they allow the money to be kept within the family. Many private lenders also do not require collateral when providing the loans which provides consumers with bad credit a means to improve their scores while buying their own home.
One significant negative of making a private loan within a family is the risk of the relative not being able to pay back the loan. Besides being a negative impact on each person’s finances, it can also result in a soured relationship between the lender and the family member who borrows the money. Depending on the nature of the private loan, the person obtaining the mortgage may not be able to deduct the interest from their federal income taxes. Read our next post on private mortgage dangers in Ontario.