Reasons to turn to private mortgage lenders
When private-mortgage-loan interest rates of 14 percent to 18 percent are added to four to eight points, the real estate investor/borrower is paying 20 percent or more annually for the money borrowed. It’s obvious why this is a good deal for private mortgage lenders, but why should real estate investors be willing to pay these high rates when institutional mortgage loan rates are 7 percent to 10 percent? There are many reasons, but all fall into four categories.

• Qualifying problems
  In this case, real estate investors/borrowers and/or the real property do not qualify for an institutional mortgage loan. This can be because of anything from low borrower credit scores or too much borrower debt, to borrowers’ properties not producing a sufficient income. Further, the property itself may not support the type of loan the borrower wants. Many institutional lenders will not loan amounts less than $500,000; many will not lend second-lien money even if there is significant equity in the property. If major repairs or rehabilitation is necessary, institutional lenders will not be interested unless the project is very large and the borrower has an extensive track record.

In these cases, private mortgage lenders may be the only resource available for real estate investors/borrowers. Institutional lenders are concerned with both the property’s appraised value and borrower and property credit. Private mortgage lenders are only concerned with the appraised value, as long as it represents a fair market price.

Hence, if a property is producing or can produce sufficient income to pay the note and the property value will fully secure the note and provide sufficient equity, then borrower credit is not an issue for a private mortgage lender.

• The need for speed
  Speed in closing the transaction is also a factor. Mortgage money obtained from banking or institutional sources (conventional mortgage money) usually takes 60 to 90 days to fund. Institutional lenders require an appraisal of the property value, a detailed examination of borrowers’ credit histories and current financial statuses, financial statements and tax returns — not only for the property securing the loan but for all real property and business interests owned by the borrowing entities and borrowers themselves.

Private mortgage lenders, on the other hand, can usually complete a transaction within seven to 10 days. Since the property itself is the main criterion used to determine loan eligibility, much less information on borrowers and their other properties is required, which results in a much quicker approval process.

Private mortgage lenders can make a decision within 24 hours of receiving information, whereas institutional mortgage money must be approved by a loan committee that may only meet twice a month and may send the loan request back to the loan officer for more information, thus necessitating a further two-week delay until the committee meets again.

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