Getting the right type of loan for your property is usually not as simple as 1-2-3. When a potential borrower asks which loan type is best for them, the typical response might be,
In order to determine the reasons why anyone would even consider a private money loan as a financing option, we need to first understand the overall objectives and circumstances of the borrower. (The person applying for the loan)
There are several ways to finance a piece of real estate in California, but before you start filling out loan applications for your home loan refinance, a little research and due diligence can save you time and money in the long run.
Here are a few situations when you would consider a hard money loan compared to a traditional mortgage loan through a bank or credit union.
Your unique situation doesn’t “fit the box”
The selection of loans is a pretty short list these days.
If you don’t meet the requirements of the first three loan types, a private money loan may provide the funding solution you are looking for. The list below reflects the common types of loans that you would use for refinancing or purchasing real estate.
1. Conventional Mortgages
These are the traditional mortgage loans which are sold to Fannie Mae and Freddie Mac. You may qualify for a conventional loan if you have a strong credit history and you can document your income. These loans have the lowest interest rates, but are generally the hardest to qualify for.
2. Mortgages insured or guaranteed by a government agency.
Examples of government-backed loans are made available through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). These loans have backing by government agencies and are a good alternative when you might not qualify for a conventional loan for any reason.
3. Portfolio loans
Portfolio loans are not normally sold or transferred to other lenders. Instead, the loans are approved, funded, and serviced by the financial institution, which is usually a local bank or credit union. They keep the loan in their portfolio of investments and handle the ongoing servicing of the loan.
4. Private Money Loans
Private money loans are arranged through a licensed mortgage broker or directly through a private party investor (lender).
As you can see, there are several financing options available. However, the actual selection of programs available to you will be limited by your own specific needs and objectives. A good mortgage professional will be able to figure out which type of loan would be best for you based on your situation.
The factors below will have an impact on the type of loan you may be able to qualify for:
- Personal credit history and credit scores
- Employment and income history
- Ability to document your income
- Desired loan amount (The loan amount you are requesting)
- How much money you have available in your bank accounts and investment accounts (assets)
- The appraised market value of the subject property
- The type of property you will be using as the security for the loan
- Occupancy: whether you will live in the property or use it as an investment property (income property)
You don’t have time to waste.
You’ve heard the old cliché. Time is money.
In real estate financing transactions, timing can be a big consideration for the type of loan a borrower will apply for.
The normal processing time for mortgage loans obtained through a bank or credit union can be upwards of 45-90 days from the time you submit a full application. For some people, that can be way too long. It just really depends on the circumstances.
You need financing based on common-sense lending.
It has been said that common sense isn’t common anymore.
There is a constant buzz In the world of mortgage lending where real estate agents, mortgage brokers, and the general public talk about how crazy and “ridiculous” the lending requirements are these days.
Since we are in a new economy after the housing market crash, I do agree that the rules have changed. The point of lending rules being ridiculous is more of an opinion depending on which side of the lending table you are on.
As a Borrower, you will certainly face more requirements today than you did seven years ago. The lenders also need to be very cautious to make sure their investment money is safe and protected from risk.
The same would be true for any savings, retirement, and investment accounts that you personally own. If you were investing $50,000 or $500,000 of your own retirement fund, there is a good chance that you would want to ask for important information from the person who will be borrowing the money.
That’s why private money loans seem to be more common-sense than conventional mortgages. The lending decisions are based primarily on the equity in the property instead of the borrowers’ personal credit history. That means less paperwork.
Therefore, the formula is pretty straightforward. If you have enough equity in the property and you can prove your ability to repay the loan, you have a pretty good shot at getting qualified.
Now that you’ve learned some of the reasons people use private money, let’s address some of the common misconceptions about this type of financing. In the following articles, we’ll discuss the 5 Myths About Private Money Loans.
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