As I have written previously, a private mortgage can come with a number of benefits that can make it a preferred form of financing, even for individuals that could also qualify for a bank or institutional mortgage.
Benefits such as faster approval, interest only payments, and close to conventional mortgage rates are available for lower risk mortgage financing opportunities.
Lower risk is related to lower loan to value ratios, solid cash flow, and reasonably good credit.
But when the risk of financing becomes higher, the benefits you can expect to get from a private mortgage are going to be reduced as well.
For instance, individuals with very bad credit that are looking for a high ratio mortgage on their residential or commercial property are likely going to have to deal with less than ideal private mortgage rates and terms.
In higher risk situations similar to the one described above, there is only a small percentage of mortgage lenders that will even consider these types of applications and the ones that do are sometimes called hard money lenders due to small margin of error they are working with.
For higher risk scenarios, borrowers can expect to pay higher lender fees, higher interest rates as well as have repayment requirements that include a fully amortized payment schedule for a period as short of 15 years.
In these situations, the lender is focusing in on gaining as much of the borrower’s cash flow as possible to reduce their risk of loss and to get the majority of their return at the beginning of the transaction.
Further, private mortgage lenders that will consider higher risk deals may also look to other forms of security in the form of other real estate properties, cars, jewelry, and so on.
In many cases, some of these additional items to be pledged as security may not even have much equity in them, but the overall blanketing of your available assets increases the lender’s chances of getting their capital back and reduces the borrower’s ability to acquire any more capital after the transaction is completed through further leveraging other assets.
This also translates into higher costs to the borrower as all the security registration costs will be born by the borrower.
So in order to gain many of the potential benefits that a private mortgage can offer, its important that the risk to the lender is appropriate in order for more benefits to be conveyed.
To get the most potential benefits out of a private mortgage arrangement, you need to be working with an experienced private mortgage broker who has direct access to a wide spectrum of private mortgage lenders.