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 qualify
The 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 period
Private 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.