The problem for most borrowers in recent years hasn't been low mortgage rates, it has been the strict lending requirements imposed by most lenders. If you're having trouble qualifying for a conventional mortgage, a private-mortgage lender may be an option. Private money funds, also known as "hard money," usually come from private investors or private lending companies who are willing to loan homebuyers money to purchase a specific property, says Jared Martin, chief executive officer of Keystone Funding, Inc. in Media, Pa. Homebuyers can often find these lenders by joining a real estate investment club in their area, Martin says, but these loans are most often secured by home investors. Unfortunately, not every homeowner will be successful getting money from a private lender. Here are the pros and cons regarding private mortgage loans:
Pro: Easy to qualifyThe loans could be a great option for homebuyers who are not able to qualify for a traditional mortgage because of less-than-perfect credit, debt or for self-employed individuals who can't always provide proof of a steady income, Martin says. "The underwriting of the hard money loan is not so 'person' focused as it is 'property' focused," says Brian Frederick, a certified financial planner who advises real estate investors in Scottsdale, Ariz. "A person with poor credit can get a hard money loan if the project shows a likely profit."
Con: Short payback periodPrivate loans aren't paid back over 30 years like a traditional mortgage. Many private-money lenders expect the loan to be repaid within an extremely short time period, such as six to 12 months, says Martin, though "it could occasionally go to two years," he says. Private lenders are often looking for a quick return for their money, and they usually aren't set up to service a loan for several years the way a typical mortgage company is, he says.
For this reason alone, most homebuyers should look elsewhere for mortgages, says Jeff Curtis, a Realtor and director of mentoring at Keller Williams in Pasadena.
Pro: Great for 'flippers'However, you might consider such a short repayment period if you plan to sell or "flip" the house within that timeframe, or expect to be able to qualify for a conventional refinance within a few months after acquiring the property, Curtis says. If you plan to make extensive renovations in a short time period that will boost the value of the home, it is possible that you could sell or refinance the property fairly quickly, he says.
Pro: Geared toward 'fixer-upper' propertiesHomes that need extensive renovations generally can't qualify for conventional mortgages, no matter how good the borrower's credit is, says Frederick. In those cases, private money can play an important role, he says. "Some vacant homes may have been vandalized or someone may have stolen the plumbing," he says. A private lender could step in and provide financing to get the house in sellable condition, and then "flip" the house, says Frederick.
Con: High interest ratesInterest rates are much higher with private-money lending than with conventional loans, Curtis says. In fact, mortgage rates are sometimes more than double typical 30-year mortgage rates, often 12 to 20 percent per year, he says. Mortgage rates are so high because private lenders don't usually require perfect credit. "Loans from private lenders are generally secured by the property in question, so it's usually not as important to the lender if the borrower has pristine credit or not," Curtis says.
Pro: Short approval processIf you have a house that you believe is a candidate for a private loan, the approval process often takes just a couple of weeks, as opposed to 30 to 45 days for a conventional loan, Frederick says.
For many borrowers, getting a loan that quick is a good tradeoff for higher interest rates. "Private money lenders don't require a long drawn-out loan process like a conventional mortgage does," Frederick says.If you have a house you want to rehab, and you feel that you could improve it enough to boost its worth in a short period of time that would allow you to pay off a private loan and replace it with a conventional refinance or sale, then getting a private loan is a viable option, says Frederick. As long as you understand the caveats and do your research, it is possible to successfully secure a property without a conventional loan.