The profit potential in private mortgages for the lender, and the clear benefits to the borrower, has helped this investment strategy gain notoriety in the investing community.
Private mortgage lending involves an individual investor taking on the risks and rewards typically held by mortgage lending institutions. This type of lending can offer good returns and low risk if structured properly, because it is secured against the actual property.
Private mortgages have several benefits to investors and borrowers. They allow borrowers who don’t qualify at traditional lending institutions to get mortgages elsewhere. Investors holding private mortgages can receive interest rates significantly higher than standard rates offered by banks.
The mortgages are usually short-term—from six months to three years—and typically based on the property’s equity value. In general, private mortgages hover between 50 and 70 percent loan-to-value (LTV). If investors need to get their money out before the loan matures or is paid off, there is the potential to sell the private mortgage to a number of companies that buy them.
Private mortgages can be used for commercial properties.
Different property types are generally covered by different LTV ratios. Although the valuation of a commercial property may be a little more challenging to ascertain, this is usually off-set by loaning at a lower LTV. Theorectically, a lower LTV on a property correlates with lower risk.
Loans are underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the ability of the borrower to repay the loan and/or the ability of the borrower to manage the property or successfully complete a rehab and sell the property. Owner occupancy, debt ratios and other issues are seldom a factor. Appraisals are another key benefit. These loans are usually approved within days and are often funded in two weeks or less.
email: Rick Curtis
