You’ve come across a residential property that you would like to call home. The only problem is that the bank and most mortgage companies are not interested in extending the financing. Do you have to put off the dream of becoming a property owner? No necessarily. While traditional lenders may not want to work with you, a private lender may help you with a mortgage.
Exactly what is a private mortgage loan? This type of lending approach may involve borrowing the money from an individual, a group of angel investors who specialize in residential property mortgages, or some sort of investment corporation that takes on mortgages among other kinds of investments. Instead of working with a bank or mortgage company, you are dealing with people who are more focused on the market value of the property and where it’s located.
Your personal credit rating is of less interest. At the same time, those lenders may also report to the major credit bureaus, so the mortgage can help you improve that score. In order to decide if this type of financing is right for you, do pay close attention to these aspects and ho they relate to the arrangement.
You and the Private Lender Set the Qualifications and Terms
One of the advantages of this type of lending situation is that you and the lender can work out the details of how the money will be repaid, the rate of interest that will apply, and even structure the payment schedule so that everyone is happy. Since this is outside the scope of a standard lending agreement, it makes sense to have a lawyer look over the contract before you agree to anything. Doing so helps to ensure there are no misunderstanding about the type of commitment you’re taking on.
But Do Pay Attention to the Interest Rate
Some might tell you that it’s possible to go with any rate of interest that the two parties consider equitable. That’s true up to a point. You do want to see how the rate compares to what’s known as the Applicable Federal Rate. This is because the rate could have some impact on the amount of taxes that you will pay for the duration of the mortgage.
Always Work With a Written Contract
Even if the personal mortgage is financed by a loved one, don’t rely on verbal agreements. A properly written contract will protect the interests of both parties. It also ensures that there is no misunderstanding about what each party has agreed to do.
Remember that Relationships Are at Stake
While your intent is to honor the debt no matter who extends the mortgage, keep in mind that it’s not just a standard business deal. There may be personal relationships involved as well. The last thing that you want to do is damage those relationships. Ideally, all parties will still feel as comfortable with one another once the loan is paid in full as they did when the deal was struck.
A private mortgage is not for everyone. It can be the answer when financing through a traditional institution is not possible or practical. Make sure you understand the specifics of how the mortgage will work and ensure you can comply with all of the requirements. If so, this could turn out to be the best way to become a homeowner.