Should I Use Private Mortgage Lenders?
If you’ve been turned down for a home loan by a bank you might want to look at private mortgage lenders. This is a wide ranging group that may include some good financing sources — and not a few sharks.
In basic terms the world of lending can be divided into two groups, regulated lenders such as banks, S&Ls and credit unions and lenders who are not regulated such as your Uncle Ralph, friends and local investors.
In the first category we have national lenders and their mortgage subsidiaries who are regulated by the federal government. We also have stated-based lenders who are regulated by, well, individual states.
The regulated lenders must play by the rules — but since lenders have lots of PAC money and many lobbyists in Washington the “rules” are hardly tough — how else would you explain why regulators allowed lenders to offer toxic loans such as option ARMs and interest-only mortgages to borrowers who plainly would be unable to repay?
Private Lenders
The attraction of cash from private lenders is that it can be available very quickly, an underwriting process may not exist and in the best case there will be little cost to originate the loan.
On the other side of the spectrum we have private lenders, a wide-ranging species of folks with cash to lend.
First, we have friends and relatives who are distinguished by the fact that they have money and are willing to provide mortgage financing for you. There are not too many of these people, in part because few individuals want to lend money for a period of 15 to 30 years.
But, if you can find friends and family who will advance you money, then you need to consider two ideas. First, congratulations, you have found a lender. Second, beware of the sticky stuff.
When you borrow money from people you know your relationship will change. Egos and status may shift. If it happens that your relationship sours over time there can be big problems. There can also be problems with other friends and relatives become jealous, or if your benefactor dies or becomes incapacitated.
To protect the lender — and to protect you — there must always be a written mortgage agreement. One source to consider is Virgin Mortgage which offers a program tailored to social lending among friends and family. Alternatively, you can have a local attorney draw up a proper loan agreement.
It could happen that when a private lender passes away that the loan will be forgiven by the will — but maybe not. In any case you need to protect yourself with a proper loan agreement just in case Uncle Ralph suddenly wants his money back or there is some question regarding interest rates or other loan terms.
Hard Money Lenders
You may also be able to get money from hard money lenders. These are lenders who seek to finance individuals who really need cash. And, as you might guess, those who need cash have lousy credit credit. The result is that they pay very high interest rates.
Hard money lenders are often unregulated because they make few loans in a given jurisdiction. Sometimes several individuals get together to create an investment group or club to share risk and to increase funding.
Whatever the situation, with a hard money lender you’re likely to need considerable equity (say 25 to 50 percent, depending on local market conditions) and you will face big up-front costs that are taken from the loan — say three to five points.
Given the enormous costs of hard-money lending you can bet that a lot of borrowers fail. However, with a lot of equity the hard money lender does okay because they can foreclose and re-sell the property.
In other words, if you have a need for a hard money lender you should really consider selling the property or getting a loan modification. For specifics, speak with a HUD counselor, a local attorney or legal clinic, or find help with a community housing group or local bar association.
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