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Mortgages from Private Citizens? It's Actually Happening!


Mortgages from Private Citizens

Acquiring a home mortgage can be a stressful and time consuming procedure. After all, banks require that you provide them with a lot of paperwork before they'll grant you a loan, and many of those lenders have become stingier when it comes to their clientele in recent years. That's why many prospective home buyers are pursuing a different option to receive a home loan – borrowing money from private investors. It's a practice that's been around for quite some time, but it has picked up steam in the last couple of years.

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So, how does it work? There are two types of loans from private citizens. Both involve a neutral third-party negotiator who is usually a private, non-bank lender. Of course, the lender's services aren't free, so they take a cut before repayments of the loan are distributed to the investor. Typically speaking, it's a broker's fee of 1% of the mortgage amount. The first type of private loan is a direct one-on-one business relationship. The lender sets up a meeting between an individual investor and an individual borrower. They meet so the investor can determine if they want to lend the borrower money, and to specify the terms of the agreement. After all, the investor is looking for a new way to make a profit from an investment, so they want to make sure that they'll get a profitable return from the interest on the loan.

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The second option is when a group of investors pool their money, and allow the lender to lend it out to borrowers. All partners in the pool get an equal return, but unlike the individual investor, they often have no say as to who is allowed to borrow their money. It may sound easy, but private loans aren't for everyone. In fact, most borrowers who pursue this type of loan are high-income individuals with high credit scores and the ability to pay a significant down payment. Oftentimes, they are self-employed and don't want to provide proof of income to a bank, perhaps because they have experienced a down year financially, or are waiting on a lump sum (usually a bonus or payout) to come through.

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So, instead of going the traditional route, they try to find a private investor to lend them money. Because mortgage lending is a risk, most private lenders will only deal with borrowers with high income and the ability to put down a 30-40% down payment. With such large down payments, the loans are considered low-risk for an investor. After all, if a borrower already has that much equity in a home, it's unlikely they'll default on the loan. Private loans typically have a higher interest rate, anywhere from 6% to 13%, as opposed to the current 3.3% national average rate on a 30-year, conventional, fixed-rate mortgage. So why would a borrower be willing to put more down on the money, and pay more interest? The answer is convenience and flexibility. Private loans are often processed much quicker than mortgages through a traditional lender, and can also be drafted up for whatever duration the two parties agree upon. In other words, if you're in a hurry to buy a house, and only want to be paying on it for seven years, instead of waiting for a traditional lender to approve your loan, and having to sign a 15 or 30 year mortgage, a private loan might be a good option for you. If you're interested in a private loan, and think you have the income level and credit score necessary to acquire one, contact a mortgage broker today. They can get you started, and can begin the search for a potential investor match for you. Like all business transactions, private loans include fine print, so make sure you read and fully understand the terms of your agreement before you sign on the dotted line.

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