Those who are looking for a mortgage but have been turned down by the bank because of bad credit may sometimes look at borrowing from a private lender through a private mortgage. Private mortgages can be somewhat tricky to understand, in part because they include many different types of mortgages, and because they are available for a multitude of different reasons.
Usually, a person will look for a private mortgage when they have been turned down by the bank for a mortgage. Most often, this is because of bad credit, as a bank will look at the equity a person has in their home, and that person’s credit history. However, there are reasons other than bad credit that a person may obtain a private mortgage, such as difficulty obtaining the type of loan they want (such as an agriculture loan.) Or in the instance of construction loans, a homebuyer may have already used their first bank mortgage to its fullest extent, and the bank will not provide a second mortgage. In this instance, a private lender could step in and cover the remaining balance of the construction costs in the form of a private mortgage. These are just a few instances other than a case of bad credit when an individual might seek a private mortgage. In these cases, a private mortgage could be in either the first or second mortgage position, but when referring to getting a private mortgage because of bad credit, they are almost always in the second mortgage position; and that’s because the private lender will require there to be existing home equity in the property.
When a homeowner has bad credit and needs a large sum of money to pay taxes, medical costs, or any other high and unexpected expense, they most likely will be turned down by the bank for a second mortgage. However, provided that the homeowner has built up enough equity in their home, they could obtain a private mortgage from a private lender. This can prove to be especially beneficial when the homeowner is trying to rebuild their credit, as they can consolidate high-interest debt into a lower interest private mortgage. Once the private mortgage has been repaid, they then have a clean slate and can start improving their credit rating again.
Homeowners need to understand however, that private mortgages typically come with higher interest rates than conventional mortgages. And if you’re using a private mortgage because of bad credit, the rates are going to be considerably higher, although still much lower than those attached to credit cards and personal loans. The amortization periods of private mortgages are also usually much shorter, with the life of the loan extending only one or two years.
Private mortgages can be difficult to understand, but it’s because they cover such a broad range and are so uniquely tailored to each homeowner and their needs. And even if that makes them a more challenging concept to grasp, it’s exactly what makes them the perfect answer for many homeowners.
