We are all familiar with how much lending has been restricted at the bank level in recent months. How many of us have found a great deal but, for various reasons, just could not secure sufficient financing to make it work? Or how many of us have been in a real estate scenario where we needed refinancing but could not get it on the terms that we wanted? Have you ended up watching opportunities pass by? What if there was a way you could have secured the financing you needed to close that deal or secure that refinancing.
Private lending is often an overlooked solution to financing problems. Misconceptions, myths and mystery surrounds private lending.
There are a variety of lenders that could be called private lenders, for which the fees and costs of financing vary substantially. The private lender can be difficult to access if you don’t know where to go and many borrowers end up with very costly solutions when they answer ads on the radio. Some of the benefits to using a private lender is that, in many situations, there are more opportunities to customize the mortgage that the borrower needs and, in many instances, fees can be lower than other institutional private sources.
How does private individual lending work?
A mortgage broker who specializes in private financing can help a borrower by placing their loan with a private lender who is familiar with the area. An individual lender seeks a better return than bonds and does not want exposure to the stock market; instead, an individual lender wants to earn a return from real estate without directly owning it.
A private mortgage is generally short term in nature (a few months to 2 years), is secured by real property (with the mortgage registered on the title, and the return is the interest that the borrower pays.
The lender will make an offer on the mortgage stating the terms that they require to lend the mortgage. There can be a negotiation and private lending offers opportunity to tailor mortgage requirements more so than an institution who only offers certain mortgage products that may or may not be open and may or may not have other requirements. When an agreement is reached, a lawyer or notary will prepare the necessary documents and a charge will be registered against the property just like any other mortgage. Private financing does cost more that conventional financing, and private money is a market like any other which is moved by supply and demand; the price of which fluctuates accordingly.
The following are some of the situations where private financing offers significant benefit:
1. A private lender, may lend more on the basis and merits of the property so if a borrower has less than stellar credit or a lack of credit or has a difficult time proving income but the property itself holds good value, the private lender will lend on the merit of the property whereas a conventional lender will decline it.
2. Private borrowing can also work for properties which are held in a trust or in a company. Most banks won’t lend to a trust because they require a personal guarantee.
3. Private lending is also a good solution for temporary needs, such as when a borrower feels that in a short time their credit may be good enough to get conventional financing or if they are waiting for another deal to close in order to release funds to use for the new deal. This works well with private money because most private mortgages are for relatively short terms, 12 months or 24 months.
4. Private mortgages can even be negotiated to be ‘prepaid’ mortgages, such as when the borrower won’t be able to make monthly payments; this way the borrower simply pays the whole amount (including the capitalized interest amount) back at the end of the term. This especially makes sense for someone who is selling their property and knows they will have the funds to payout the mortgage within the term of the mortgage.
5. Private lending is also a potential solution if the location of your property is outside of where a conventional lender is willing to lend.
6. If you are in the process of being foreclosed on, a private mortgage may be able to save your property by refinancing the loan that is in arrears.
A private lender has the same rights as a bank when it comes to being paid. If the mortgagor is behind on payments the private lender has the right to pursue foreclosure just like a bank would in accordance with provincial or state laws. As well, if payments are late, it is typical for a charge to be added which would be defined in the mortgage agreement. What is important to remember is that for the extra cost of financing the borrower has the opportunity to negotiate what terms are important to them to make the deal work and a private mortgage broker can help with this as a liaison between the borrower and the private lender.
Private lending might be the right solution for you, but it’s worth nothing that it is not a solution to buy property with no money down. Realistically, in the current market, most private lenders will not lend above 80% of the property value, so you need to have at least 20% equity (and commercial properties need even more). Private mortgages can be in first or second position, and possibly a third depending on the amount of equity. They can be used for residential, commercial and even in construction financing.
If you have further questions regarding private mortgages, refinancing, debt consolidation or second mortgages please contact us at firstname.lastname@example.org.