How Do Private Mortgage Loans Work?

A private mortgage lender is usually a small company or individual businessperson that makes personalized loans based on a collateral value of specific types of real estate. They are mostly used by borrowers who have encountered difficulties in obtaining loans through other channels, because private loans entail a much higher interest rate than regular types of loans. Private loans are normally made for a duration of one year or less. They have become more widely-used due to the recent turmoil in the conventional financial markets.

Borrowers with bad credit in a high-risk category will seek to obtain private money loans because they may have few alternatives, even though the rates of interest are much higher. The risk to the lender is mitigated not only by the higher interest rate, but also by the higher loan-to-value ratios required (normally 30% or higher). Besides private individuals, there are also many high-risk companies who choose to work with private lenders to avoid the stringent requirements demanded by commercial lenders.

There are many different uses for private money loans, but they are normally used to enhance the value of the underlying property. There may be improvements, such as new construction or renovations, that need to be performed. A private loan can also be used to refinance an existing mortgage. Sometimes the borrower is involved in foreclosure or bankruptcy proceedings, and a private loan can help to lessen the negative consequences. Also, private loans can be structured as either primary or second mortgages.

The most important criterion to private mortgage lenders is the value of the hard assets of the borrower, particularly the real estate that is used to collateralize the loan. A private mortgage deal will often include such features as interest-only payments, borrower participation, and partial deed releases as repayments are made. Another characteristic feature of a private deal is the speed at which it can be accomplished.

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