Hard Money/Private Money
In recent years, strict lending regulations have made it more difficult for some buyers to qualify for a home loan. If a buyer has low credit scores, insufficient cash for a down payment, or is not able to show a steady income stream can their application for a traditional loan could be turned down. Although this might seem like a roadblock, there are other ways to secure financing for a new home. A private mortgage loan, also known as “hard money,” can offer a solution. With a private mortgage, the homebuyer will borrow money directly from a private investor or a private lending company. Historically, contractors and housing developers have primarily secured this type of financing, but in the last few years, private mortgage loans have appealed to individual home buyers as well.
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Advantages of a Private Mortgage Loan
A private mortgage is an agreement between the individual lender and the homebuyer. The terms of the loan are set by the private mortgage lender and are not regulated by a government association. Therefore, these loans are much easier to qualify for than a traditional loan.
Private lenders are more interested in the potential value of the property than looking at the borrower’s credit history. Avoiding standard loan requirements is a helpful loophole for homebuyers who have a significant amount of debt, are self-employed and unable to prove a steady stream of income or have poor credit history.
Another good use of a private mortgage loan is for an investment property that can needs work and can be flipped quickly. Oftentimes fixer-uppers and homes that need extensive renovations won’t qualify for a traditional loan, even if the borrower has excellent credit.
Drawbacks of a Private Mortgage
There is a higher risk for the private lender since they are not backed by the FHA or a financial institution. A private mortgage will almost certainly have a higher interest rate than a traditional loan. A private lender will usually also ask for higher down payment up front, sometimes up to 35% of the home purchase price.
These loans are much shorter than traditional loans and typically range from just six months to two years.
There are also no tax benefits when you take on a private loan. With a traditional loan, the annual mortgage interest can be claimed as a tax deduction. With a private mortgage loan this isn’t the case.
The idea candidate for this type of loan is a buyer who is either looking to flip a house in two years or less, or a buyer who is confident they can pay the loan back quickly.
