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When it comes time to take out a mortgage on a purchase project, most people immediately think of big banks. However, they are not the only ones on the market. Indeed, there are many private lenders, a somewhat lesser-known and less-used option.
Despite the fears and skepticism that they can sometimes engender, they can be very useful in certain circumstances due to the high interest rates that some charge for the loan. To demystify certain assumptions, we offer an overview of private mortgage lenders, their role, and the pros and cons of using their services.
Private Lender vs. Financial Institution: What’s the difference?
Financial institutions are of interest for most funding projects. However, banks may be less favorable to investors wishing to invest in the short term. In some situations deemed riskier, they may even refuse to provide the requested funding.
In a case like this, a person who wants to make his project a reality can turn to private mortgage lenders. Their modus operandi and eligibility criteria differ from traditional financial institutions. An individual whose application for financing has been rejected by a bank may find that his file has been accepted by a private lender.
Private lender mortgages therefore present themselves as an alternative source of financing for financial institutions. This can be an excellent choice if the terms offered by the lender are acceptable, in terms of interest rates, filing fees and qualification requirements.
One must be careful before engaging with the first private lender one meets: some are very expensive! Sometimes it is better to miss an opportunity than to use their services.
What is a private mortgage lender?
Who are these private lenders that can help you complete your project? Of course, there is not a single type of private lender. Such lenders can come from many different backgrounds. Some may be groups of investors who have formed mortgage investment companies or syndicates providing capital from mutual funds.
It is also possible that a private lender is simply a wealthy individual who has made a fortune through the profits of a business, the sale of his business, his own assets, an inheritance, personal savings, etc. Many of them are or have been real estate investors. They therefore use the capital they have accumulated over the years, use lines of credit or finance the buildings they own to make the loan.
How do private lenders work?
In general, private lenders function much like large financial institutions. Most of them conduct a credit survey, analyze the profitability of the building, examine the reliability of the borrower, the risk he incurs and the guarantees he can offer.
The first step is of course to analyze your project. The criteria used to assess your eligibility vary from lender to lender. Many will charge a fee to review your file, which is either a percentage of the loan or a lump sum.
If your application for financing is accepted, you will receive an offer from the lender in which you will find information on the terms of the loan:
- Interest rates;
- Repayment period;
- Guarantees required.
In case of uncertainty, do not hesitate to have the offer reviewed by a specialized notary. They will be able to read the clauses and, if necessary, explain them to you so that you fully understand their content. You can then consciously accept or decline the offer.
You should know that private lenders are usually riskier than banks. However, in return, they demand higher interest rates or other stricter repayment terms.
Private lenders may grant first or second mortgages, as appropriate.
In what situations can you get a private mortgage?
While private lenders are not usually the first source of financing that people turn to for projects, this does not mean that they are a bad alternative. In some situations, it may be beneficial to retain their services.
This can happen, for example, when:
- The bank rejects your loan application;
- Your deposit is not enough to finance your project;
- Your employment income is not sufficient to qualify for a financial institution;
- You have been independent for less than two years (this represents an increased risk that prevents banks from granting a loan);
- You are discharged from bankruptcy or have a poor credit rating;
- You need money quickly or for a short time.
In any case, it is essential that you ensure that the loan requested does not exceed your funds limit. Make sure you can repay the amount you borrowed before continuing with your project. The goal of using private mortgage lenders is to help you realize your ambitions without accumulating too much debt. Caution is essential!
Advantages and disadvantages of private mortgage lenders
Here is a list of the main advantages and disadvantages of using a private lender for your real estate project.
- The loan is generally more flexible;
- The loan is approved more quickly;
- There is often no penalty for early repayment;
- There are fewer restrictions associated with the loan;
- This type of lender has a higher risk tolerance.
- Interest rates are higher than banks;
- In some cases, the contract may contain clauses that are harmful to the borrower;
- Some people pretending to be private lenders can be mean-spirited.
Beware of scammers!
Before you start doing business with a private lender, make sure you are not in the presence of people posing as such. They usually charge fees up front to analyze your case without wanting to fund you. That is how they get money without ever making loans.
Unfortunately, these types of scammers exist, so you need to be vigilant and do your research. For example, you can request references from your potential lender, search the web, check whether they have received complaints from the Consumer Protection Authority or the Financial Markets Authority, etc.
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