Private Mortgage Lender Requirements: The Top Things You Need
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August 3, 2024

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Why do you need to know private mortgage lender requirements?

Traditional banking is not always the best choice. Securing a mortgage through your standard banking institution can sometimes be challenging, especially for borrowers who do not meet the standard criteria.

If this describes you, where can you go for mortgage approval? Private mortgage lenders offer an alternative, often providing more flexible terms and faster approval processes.

However, understanding the specific requirements of private mortgage lenders is vital for a successful application.

This article outlines the top things you need to know about private mortgage lender requirements to help you discover if this mortgage option will work for you.

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What are private lenders?

Like standard banks, private mortgage lenders are companies (sometimes individuals) providing loans to potential borrowers.

However, unlike traditional banks, private lenders use their own funds or private indivduals and often have more lenient qualification criteria.

This makes them an attractive option for borrowers with non-traditional income sources, poor credit, or those needing quick access to funds.

Key requirements for private mortgage lenders

While private mortgage lenders are generally more flexible, there are still specific requirements and criteria they consider when evaluating loan applications.

Here are the top things you need to meet or understand when approaching a private mortgage lender:

Pre-approval

Applying for pre-approval is always one of the first moves you should consider if you want to use a private mortgage lender.

A simple pre-approval form, once completed, can greatly simplify the questions that a private lender needs to answer about your loan potential.

As a bonus, it also clarifies your own insight into what it will take to be approved and how well you’re positioned to afford the payments.

Real estate brokers

Real estate brokers often have special connections with private lenders offering non-traditional financing options.

They can often leverage their market knowledge and networks to secure favorable client terms and rates.

By understanding the specific needs of both parties, brokers often can facilitate smoother transactions, ensuring borrowers obtain the necessary funding while lenders find suitable investment opportunities.

Property value and equity

Private lenders emphasize the value of the property being used as collateral.

They typically conduct a thorough appraisal to determine its market value.

The loan-to-value (LTV) ratio is a core factor, representing the loan amount compared to the property’s value.

Most private lenders prefer an LTV ratio of 70%, meaning they will lend up to 70% of the property’s value.

The more equity you have in the property, the better your chances of getting more favorable loan terms.

Down payment or equity stake

A substantial down payment or equity stake in the property is fundamental when dealing with private mortgage lenders.

Unlike traditional lenders, private lenders focus more on the property’s value and the borrower’s investment than solely on credit scores or income verification.

Larger down payment amounts will reduce a lender’s risk and demonstrate the borrower’s commitment to the investment.

Typically, private lenders may require a down payment of 30%.

Financial transparency

While private lenders are less stringent about credit scores and traditional income verification, they still require certain financial transparency.

This includes providing documentation such as:

  • Bank statements
  • Tax returns
  • Proof of income or assets

Supporting documents help the lender assess your financial stability and ability to repay the loan.

Even though the focus is more on the property and your equity, demonstrating financial responsibility can enhance your application.

Exit strategy

An “exit strategy” is a common lending term for a plan to repay or refinance the loan.

Private lenders often offer short-term loans—typically 12 months to three years—so having a clear and realistic exit strategy is essential.

Common exit strategies could involve:

  • Selling the property
  • Refinancing with a traditional lender
  • Generating sufficient rental income to cover the loan payments

A well-defined exit strategy reassures the lender of your ability to manage the loan effectively.

Property condition and location

These are core considerations for private mortgage lenders. Properties in good condition and desirable locations are seen as lower-risk investments.

However, if the property requires significant repairs or is in a less favorable location, it could impact the loan terms or approval.

Providing detailed information about the property’s condition and any planned improvements can help address potential concerns.

Experience and background

For investment properties or business ventures, lenders may also consider your experience and background in real estate or business.

A successful track record in managing similar properties or businesses can positively influence the lender’s decision.

This is particularly important for larger loans or more complex transactions, where the lender wants to ensure you have the expertise to handle the investment.

Advantages of private mortgage lenders

Private mortgage lenders offer several advantages, making them a viable option for many borrowers:

  1. Flexibility: Private lenders aren’t hindered by the kinds of government regulations that can restrict the loan terms you might need—setting their own guidelines for acceptable terms and rates that can often be tailored to your needs
  2. Speed: The private lending approval process is often quicker than traditional lenders, with some loans closing in a matter of days
  3. Accessibility: If your credit isn’t what you hoped it would be, or you have non-traditional income sources, you may still qualify for a private lender mortgage

Risks and considerations

While private mortgage lenders offer flexibility and speed, there are some risks and considerations to be aware of:

  • Higher interest rates: The speed and flexibility that make private lenders an attractive choice also come at a cost; private loans are typically paired with interest rates that are somewhat higher compared to traditional mortgages
  • Shorter terms: Most private mortgages are geared towards short-term resolutions, not long-term financing—a clear exit strategy should be in place
  • Fees: Private lenders may charge higher fees for origination, appraisal, and other services, depending on the lender and the particular circumstances

Private mortgage lender requirements: Conclusion

Understanding the expectations and requirements of private mortgage lenders is essential for securing a loan that meets your needs.

Focusing on property value and equity, providing financial transparency, solid exit strategy, and demonstrating relevant experience can enhance your chances of approval.

Private mortgage lenders can be the key to a valuable alternative to traditional financing, especially for borrowers who need flexibility and quick access to funds.

However, any potential borrower needs to weigh the benefits against the potential risks and costs to make an informed decision.

Marquee Funding Group can help guide you on a path to homeownership

If traditional lenders do not fit your needs, contact Marquee Funding Group with your loan scenario to find out how we can help.

We’ve helped thousands find the right path to a new home and look forward to helping you.

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