The problem for most borrowers in recent years hasn't been low
, 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
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
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
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' properties
Homes 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 rates
Interest rates are much higher with private-money lending than
with conventional loans, Curtis says. In fact,
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 process
If 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,
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,"
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