Private mortgage loans are mortgage loans initiated and held by private companies, non-banks. They are not typically sold to other lenders or Fannie Mae / Freddie Mac. They have less rules and regulations and can close much faster than a conventional loan from a bank.
Private mortgage loans are not private in the sense that they are recorded in county records, but private funding is not necessarily reported to credit agencies. A foreclosure notice and other publicly recorded documents will often find their way to credit agencies. The “private” in private mortgage refers to the non-bank status of the company making the loan.
What are private mortgage loans?
Structured the same way as other mortgages, these are mortgages made by private companies (like Little City Investments) or private individuals. Private funding is not empirically different from conventional funding, but there are less rules and less hoops.
Fewer properties will meet the (30%+) equity requirements of private lenders, but it is easier for people to qualify for the loans. Private lenders have full freedom to accept equity in the property in lieu of other qualifications. Banks can’t bend the rules, particularly not if they are selling their loans to Fannie/Freddie.
A typical mortgage lender will have credit, income, and liquidity requirements for their borrowers. They also typically have a maximum number of loans and debt to income is considered. Private lenders can set their own criteria, and we typically focus on equity, not credit or income.
Who can use private mortgages?
Private funding is very accessible, even to borrowers with less than ideal credit or inconsistent income. Private mortgage financing is also perfect for people who don’t want to be bothered to provide a lot of documentation.
Average and low credit, high debt, and self-employed individuals will all have an easier time getting approved for a private mortgage loan than a conventional one. If your credit is below 550, you are in the lowest 10% of credit scores and you may not qualify. If you do qualify, it may be at a reduced loan to value.
Conventional lenders need to meet strict criteria so their loans can be sold on the secondary market (aka Fannie/Freddie). Private mortgages are not typically traded in the same way, so private lender rules are far fewer, and far less stringent.
What are the risks of private lending?
Exit strategy is key. Private mortgage lending is typically a short term loan, 1 to 2 years. You will need to plan to sell, refinance, or otherwise pay off the property relatively quickly.
If your intention is to keep the property, private lending is a great gap funding option to get maximum leverage on your long-term loan. See #5 in this article for a great example of how a private mortgage increased a bank’s long-term loan offer from 320k to 800k.
Real estate investors use private mortgage loans to leverage real estate. These are still first lien mortgages, so foreclosure is inevitable if you don’t make your payments on time.
Little City Investments offers private mortgages for real estate investors in Texas. We finance and refinance investment property, including raw land, in the major metro areas of Texas. We’re local, direct lenders based in central Austin, 78704.
Contact us to get something started.