Private lenders are wealthy people who are looking for a better rate of return that is available to them at a bank.
They are willing to fund mortgages for individuals who, for one reason or another, may not qualify at the Bank.
Private mortgage lenders base their rates and fees on the area, type of property, the degree of risk they perceive, and estimated costs of administration.
The following list included private lenders in Canada.
Private Lenders are also considered “creative financing”. Creative financing is a term used widely amongst real estate investors to refer to non-traditional means of real estate financing, or financing techniques not commonly used.
The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of his own money as possible, otherwise known as leveraging, OPM (Other People’s Money).
Using these techniques an investor may be able to purchase multiple properties using little, or none, of his “own money”.
Hard money loans – Hard money loans are similar to private mortgages except that they are made through a hard money lender. A hard money lender may get his financing either from his own contacts with private lenders, or financial institutions with whom he has established his own lines of credit.
Hard money loans are made to real estate investors for the purpose of investing in and rehabbing real estate. Rates are a little higher than borrowing directly from a private lender, as the hard money lender may also be collecting yield spread. The hard money lender will also charge points of 3% to 6% or more. These points are often paid up front, but a few lenders may roll these into the loan.
Hard money loans are high-interest mortgages available from private investors. Desperate borrowers with poor credit scores, bankruptcies, no verifiable income, or too much debt often take out hard money loans when they are unable to qualify for traditional mortgages.
Hard money becomes a last resort when borrowers cannot meet the lending standards set by banks or government sponsored enterprises such as Fannie Mae and Freddie Mac.
Private mortgages – A private mortgage is a loan secured by real estate that is made by a private lender, instead of a traditional lender, financial institution, or government institution. These loans are most commonly short term and last anywhere from 6 months to three years.
These are asset based loans made for the purchase and rehabilitation of real estate. Because the loans are asset based, the decision to loan is based on the criteria of the property and not usually the qualifications, or credit of the borrower.
Interest rates on these loans are considerably higher than traditional loans and may range from 12% to 18%, with points sometimes being required as well. Loans are made on an LTV (loan to value) of 65% to 70%, to preserve sufficient equity in the property for the private lender in the event of default.
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