For the majority of home buyers, getting a loan is a necessary part of the journey towards owning your own property.
A mortgage from a traditional lender like a bank is the most common loan product to pick. However, if you are not likely to be approved for a mortgage from one of these mainstream institutions, you will need to turn to private money lenders.
This can be an intimidating prospect for the uninitiated, so let’s look at the main points to consider when taking out private loans to buy real estate.
Finding the right lender is important
Private loans, also known as hard money loans, are different from mortgages in that they don’t rely on the borrower’s financial circumstances to determine whether or not they are approved.
Instead they rely on the property itself being put up as collateral, which means even people with bad credit are often eligible.
Of course you still need to approach the process of finding a private lender with the same rigor as you would when looking for a standard mortgage deal.
Luckily you can find hard money home lenders online and compare the packages they offer in a matter of minutes, meaning you never need to go into an agreement without knowing all the facts.
Considering interest rates is essential
The upside of private money loans being more accessible from an applicant’s perspective is definitely attractive, but there are some caveats that apply specifically to this market.
Higher rates of interest are the most obvious sticking point, as while a mortgage might have annual charges of between 2 and 5 percent, hard money loans could fall between 10 and 18 percent, which is obviously a big difference.
This is due to the amount of risk the lender is taking. If you have a patchy finance history, and aren’t equipped to get a standard mortgage, then private lenders have to factor this into their fees.
Again, comparison of private lenders will let you identify more affordable deals. It’s just about reading the small print before you commit.
Exploring repayment schedules is vital
The other aspect of private money loans, particularly in the context of purchasing a property, is that their repayment schedules are far shorter than standard mortgages.
While a mortgage might let you repay the amount owed over between 10 and 30 years, a hard money loan could conclude within 12 to 36 months.
Once again, this is partly down to the risk that lenders are taking, but the main motivator is to attract people who want to flip properties and re-sell them.
Buying a dilapidated home, renovating it and re-selling it for a profit in a few months is perfect for people who borrow privately, because if anything a mortgage would simply not move quickly enough to cope with the pace of this marketplace.
That is not to say that private lenders are only useful if you are a home-flipper or property investor.
In some cases people get hard money loans to purchase their dream property, then secure a mortgage afterwards to repay the loan and move to a more affordable plan and period of repayment. If time is of the essence, this may be your only option.
Understanding additional expenses is sensible
We have talked about the benefits and pitfalls of borrowing from private money lenders to buy real estate, so the only thing left to do is recommend thoroughly scrutinizing any loan agreement you receive before you sign.
Additional fees and charges could be levied by lenders, and because they are not regulated in the same way as banks, they are freer to run their businesses as they see fit.
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