Alternative or Private mortgages come with fees and costs, like lender fees, mortgage administration fees, mortgage broker fees, appraisal, and legal costs.
Lender fees are variable from lender to lender as well depend on lending terms. Lender fees are usually in the range of 1% – 3 % on the mortgage amount.
Mortgage administration fee also can vary from 2- 5% of the mortgage amount, whether is 1st to 2nd or 3rd mortgage, new purchase or refinance.
Mortgage broker fees vary from broker to broker and can be expressed in the dollar amount or in percentage (usually in the range 1-2%).
Appraisal Cost – As private lending is equity-based, the lender needs assurance that they are lending against a property that is worth enough to ensure they are financially protected. You’ll be required to pay for a property appraisal through an appraiser that is approved by the lender. You are responsible to cover the cost at the time the appraisal is done but don’t pay for an appraisal until you have a lender lined up, who’s agreed to finance you.
The legal cost associated with the mortgage transaction – You, the borrower, is responsible for paying the legal fees for both yourself and for the lender. Some lenders allow to use the same lawyer as the lender, so that reduces your legal fees somewhat, but you always have the option to use your own lawyer.
It is recommended to you to always ask for cost and fees when exploring private lending options, so you know your options upfront.
Private or alternative mortgage lenders base their rates on the area, location, type of property, degree of risk perceived and estimated costs of administration. Each private mortgage interest is quoted on individual circumstances. But one is certain, your mortgage will be approved at the best rate for the property you are buying or refinancing based on your borrower profile.
Interest rates for alternative or private mortgage loans are higher compared to traditional lending since your borrower profile is considered riskier than average. Each mortgage deal is unique and may have a specific interest rate, but in general interest rate can vary from 4.99% to up 20%.
Interest rates depend on LTV %, property type, and location, whether it is 1st or 2nd or even 3rd mortgage (position of the mortgage). The lower your LTV, the better the mortgage position (a first mortgage being better than a third mortgage), and the better your current credit situation, the better your rate is likely to be. If there are more risks for a lender, interest may be higher.
Most private lenders consider only fixed – interest rate while a small percentage of lenders offers variable interest rate. Most lenders provide fixed-rate interest-only mortgages while others provide both, interest – rate and amortized mortgages. Mortgages can be fully open without the penalty to break the mortgage or can be with up to a 3-month penalty for prepayment.
Payments on a private mortgage are usually “interest-only” payments, which is one of the reasons this may be a good option for someone with temporary cash flow issues, or an investor.
Due to the higher interest rate and riskier borrower profile, most alternative and private lenders do not extend mortgage term beyond 3 years. That period allows you to build your credit quickly and eventually borrow at cheaper interest rates. Once you’ve paid off your private loan and gotten your financial situation into better condition, look for a refinance or second mortgage loan that can assist you with a more long-term solution.
Private or alternative mortgages are funds that originate from private individuals, mortgage investment companies (MICs) or mortgage finance companies (MFC) who lend out for investment purposes. Private or alternative mortgage providers are willing to lend money out to borrowers who have equity in their property, need financing for a short term (up to 3 years), and don’t qualify for a mortgage by other means.
The mortgage can be a first mortgage, or, it can be a mortgage in second or third position.
Alternative lending is aimed at borrowers who do not meet traditional lending criteria and when traditional loans cannot be approved. When a home buyer or real estate investor cannot qualify under a large number of requirements that the conventional lending sources need to be satisfied before they are able to lend, the viable options are private or alternative mortgages.
What are the reasons why your mortgage application might have been denied? Banks and other traditional lenders have strict regulations and criteria to follow when approving mortgages to the potential borrowers who apply with them.
When you apply, some of the major factors that prime lenders will examine are your credit (score, rating, report, history), your employment record and gross monthly income, your net worth, and your history of debt. If your creditworthiness comes up short, meaning you have poor finances or credit and/or a record of not paying back what you borrow, or no steady- income, chances are that your application may be denied. In other words, banks especially cannot be sympathetic to you just because you really want a mortgage.
In some cases, a reason that your application may be denied is the property by itself. Not all properties are financed by traditional lenders. Among them: rural properties, vacant land, leaseholds, hotel/motels, gas stations, and churches.
If you do not qualify under a large number of requirements that the conventional lending sources need to be satisfied before they are able to lend, the viable options are private or alternative mortgages.