This page is meant to compare private mortgages and traditional mortgages. However, these do not always compete against each other. Theyare two different types of mortgages providing unique and variable services.
The reasons why a borrower would opt for a private mortgage may not be replaced by a traditional mortgage. One borrower might not qualify for one but they can easily get approved for the other, based on the governing rules of each mortgage option. So let’s dissect these two mortgages to establish their differences.
It’s in the recent times that private lending is becoming popular. Reason being, most first-time buyers fail to meet the stringent rulesrequired to qualify for a traditional mortgage. That’s where a private mortgage comes in to assist.
In private lending,the party willing to offer the loan is not an official money lending institution but is ready to grant the loan for interest. A private lender can exist as a family member, a friend or an accredited institutionintending to make some cashfromthe loan.The easiest type of private mortgage to access is given by hard money lenders.
To qualify for such, the borrowermay need to have a collateral placed as security. But generally, this type of loan is easy to get.
A traditional mortgage is, in other words, the ordinary loan, which often, intending borrowersturn to when a thought of buying a house comes to mind. It is a long-term loan given by an official lending institution such as a bank or credit union to help finance a property purchase.
To keep the risk of losing money as low as possible, traditional mortgages have very strict requirements that borrowers must meet. Top on that, the borrower must have a down payment amount ready to submit immediately depending on a fixed or adjustable rate. You will also be subject to paying mortgage insurance premiums if the property’s equity value is below a certain percentage – mostly20% or below.
A Quick Back-to-Back Case Study of Private vs. Traditional Mortgages
It’s easier to qualify for a private loan than it is for a traditional mortgage.Private lenders don’t dwell on the borrower’s credit score, what they may want (which also vary with who you are dealing with) might be a security, and at least 20% put down to payfor the property from your side.
On the other hand,banks, credit unions, and other lending institutions operating exclusively as conventional money lenders have tough demands. Before anything, they must analyze the borrower’s financial profile in terms of credit score, documentation and their capability to manage the loan.
- Interest Rate
When it comes to interest rates, private mortgages or hard money loans are higher than traditional loans.
- Time Frame
Getting a private mortgage takes a shorter waiting period because there is less documentation involved as opposed to ordinary mortgages. The repayment period for a private loan may also be capped to less than a few years,while that of a conventional loan can extend up to 25years.
The type of property to be mortgage also matters. Traditional mortgages are easily issued on single owned or multi-family properties, while private mortgages can work on both residential and commercial properties.