The Ultimate Guide to Private Mortgages/ Lending

Investing in the real estate industry is becoming increasingly popular.  With a proper foundation and knowledge, investing in real estate can be highly lucrative for anyone that has done it correctly. However, this is information that you were most likely already aware of. Particularly interesting instead is what are private mortgages/ lending and how you can either become a lender or obtain a private mortgage as a borrower instead.

Private Mortgage Lending

Private lending is when individuals lend their own capital to other investors or other professionally managed funds. Essentially private lending services are an alternative to the traditional lending institutions we are generally familiar with like the banks. Previously in the past, real estate financing generally only came from the banks, pension funds, government agencies, etc. However, as the nature of our work changes and with more individuals becoming increasingly self-employed, loans through these leading institutions with strict requirements were not always appropriate for the average real estate investor, the need for alternative lending quickly developed. It also became obvious how those individuals with appropriate funds can invest their funds and obtain a profit through this lending than they generally would make investing their money through a bank.  Now private mortgages have developed in such a sense that they are a critical component of the real estate investment industry.

Becoming a Private Lender

The concept of private lending is relatively simply, without the funds investing in real estate would simply not exist. The average buyer is usually not capable of funding a deal with their own capital funds and will look to obtain a mortgage. Increasingly individuals are looking to obtain private mortgages as they may be unable to qualify through the bank. Regardless of the buyer’s situation, there is a likelihood of individuals choosing private lending assistance because of the flexibility it offers to buyers along with lenders. As the lender you decide the terms according to which you are offering the loan, and once the borrower has agreed upon these terms, the loan is secured. Through the process of the loan, interest payments, exit fees, period for loan repayment are all decided.

Simply put, private lending allows you to act as the lender.

How Does the Lender Make Money?

It should not be surprising, that like most businesses, mortgage lenders intend to make a profit off your loan. Traditional bank lenders generally make this profit over a longer period as the relationship of the lending is generally greater. For example, over the course of a 25- year mortgage relationship along with the additional fees/ services for banking. Private lending is similar, the lender needs to make a profit. Private lenders typically source and pool money from private investors, doctors, dentists, and other professionals and lend out this money to borrowers. These loans are typically short-term in nature and often for much smaller loans than the bank. A long with the interest rate, private lenders add on broker/ lender fees as means for funding and arranging for the short-term mortgage.

Becoming a Borrower

Loans from private lenders work like loans from the bank. Private lenders are entities that loan money to individuals or businesses. Two of the most common loans that are generally taken are real estate loans or private loans. Private lenders tend to have more efficient appropriable times than the banks because of the faster application process. They are increasingly more willing to work with borrowers that may not have the credit requirements that banks strictly require.

Costs that you must keep in mind as a Borrower:

• Direct loan costs including the interest rates, term and amortization period (length of time required to pay off the loan in full)
• Loan-related and initial set-up costs including the lender fees, brokerage fees and legal fees
• Closing and administrative costs including appraisal fees, renewal fees and collection/ management costs in case the proposed payment plan is not followed.

Typical Steps in a Private Lending Deal

1. To begin, typically a lender will require details pertaining your current situation, property, how much of your own money/ equity you have in the property and most importantly what needs to happen for you to pay them back at the end of the term. Based on your current situation and the monthly payments you can make; an experienced mortgage broker will assess what lenders are likely to be interested in your deal.
2. Most private lending situations require a current appraisal report early in the process because the property is the lender’s “security” re- payment.
3. Now based on the appraisal of your property and your current financial situation, your mortgage agent or lender will provide you with terms such as interest rates and set-up fees.
4. Assessing your situation, if it seems like a private mortgage deal will work, the next steps are a mortgage application and credit report review. In relation to the mortgage application, the required documents will be an employment letters, tax papers, proof of down payment/ equity, purchase offer, etc.
5. The application along with the supporting documentation will be compiled into a package outlining your loan project along with the risk mitigation for the lender. The lender will receive and review the loan request. Upon discussing the merits of the loan with their internal credit group, the lender will issue a Commitment to Lender Letter, if they are interested in the terms of the loan.
6. The Commitment to Lender letter will have the conditions of approval, including the most recent property appraisal. These conditions outlined must be satisfied before the loan can be funded.
7. The borrower meets with the lawyer and the mortgage funds deal is funded as agreed.

To conclude, private lending can be an increasingly attractive opportunity for both the lender and the borrower. Borrowers are seeking alternative financing sources will benefit from a faster approval process and increased access to finding. Moreover, lenders will have access to potential investments and increasing access for growth. Regardless of whether you are the borrower or the lender, private lending is a viable option for both parties.

Need legal advice?

If you want legal advice about any of the topics addressed in this article, including:

• whether you should lend as a private lender,
• whether you should borrow from a private lender,
• what should be the terms of the mortgage commitment in private lending, or
• what would happen once you borrow or lend private funds,

or any other real estate law matter, please contact Minhas Lawyers LLP.

Disclaimer

This article is intended to provide an overview of how to become a private lender and what are the steps in private lending deal. It does not constitute any legal, financial or investment advice. Minhas Lawyers recommend getting professional legal and financial advice to learn how the law ought to apply to each individual case and whether investing in private mortgages involves any risk.

If you have any questions regarding Private Lending, please do not hesitate to call Minhas Lawyers TODAY! We will work together as a team to answer your questions and discuss what your options are as the borrower or the lender.