Advantages of Using a Private Lender Over a Bank

When you’re buying a home, the paperwork process can be confusing, intimidating, and seemingly without end. For many people, owning your own home is still the “American dream,” but it is increasingly complicated and difficult to get approval on a mortgage loan from a bank. This leads many potential homeowners to invest a lot of money, time, and heart into getting the house they want, only to have the financing fall apart at the last minute.

Private lenders, such as Financial Concepts Mortgage, offer some advantages over the traditional bank mortgage structure. Understanding the difference is important if you are looking to buy a home.

What Is a Private Home Mortgage Lender?

Getting a mortgage through a bank can be a great option if you have unblemished credit, easy access to detailed financial records, and lots of patience. Rates are generally lower when you get a mortgage through a bank vs. a private lender, however, many people cannot get their loan approved via the traditional bank mortgage route. They have very strict qualifications and guidelines that have to be met as the funds are federally insured. If you’ve got a less than perfect credit score or any blemishes in your financial history, you might find your loan application denied — after a very long, tense wait.

Private lenders, on the other hand, operate using funds furnished by private investors. These private investors can include banks, individuals, or both. Private lenders specifically offer private loans. As these loans can carry a higher level of risk, the interest rates are also a little higher than what you would get with a mortgage from a traditional bank. The investors who fund the private lending institution make their money from the interest rates earned on the private loans they extend. Since these rates are typically higher, they can often earn above average rates of return on their investment.

Why Choose a Private Lender Instead of a Bank?

Banks can be much more difficult to deal with than a private lender.

For starters, a private home mortgage lender like Financial Concepts Mortgage offers greater flexibility than most traditional banks. While private lenders still have to conform to many of the same usury rules that a traditional bank does, private lending institutions are less strictly regulated than banks. This allows them to structure many different types of loans that will match the buyer’s precise financial situation to their home ownership goals.

Obtaining a mortgage loan through a private lender is typically a much faster and easier process than obtaining one from a bank. Banks have to conform to multiple potential entities like Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), or the Veterans Administration (VA), which have very strict regulations on who is an acceptable candidate for a loan. There are mountains of paperwork, dozens of forms to sign, and many documents to compile and submit, sometimes over several weeks, as part of the regular bank mortgage application process. When you get a mortgage from a bank, they punch in a lot of data and then a computer decides whether or not you are an acceptable credit risk. There is little to no discretion to move away from those standards and requirements.

Private lenders take a more customizable and tailored approach to lending. For example, a private lender might be able to overlook flaws from your past that appear in your credit history and consider factors much more current, such as your debt-to-income ratio. They evaluate the loan you are interested in getting and consider whether or not it’s reasonable for your income. If the risk seems slightly higher, they can often still extend you a loan that a traditional bank wouldn’t, at a slightly higher interest rate to make the private lender’s investors feel more comfortable with the institution taking that risk.

How Does Private Lending Work?

Much like with a traditional bank mortgage loan, the first step is applying for prequalification. We offer a helpful checklist of documents you’ll need to get started with your application. Your preapproval will help you understand how to structure your search around your qualifying price range.

If you’ve already identified a property you’d like to buy and are ready to make an offer, contact your private lender so they can provide a proof of funds letters for you. We know things can move quickly with the bidding process, so we strive to get what you need the same day you put in a request, even within just a few hours, if possible. If you’ve already had a bid accepted, we work with you to quickly get the appraisal and inspection done so you can keep the process moving quickly. The speed factor can be a big advantage to people who invest in homes for financial purchases, such as those who buy intending to fix up the home and quickly re-sell or “flip” it.

In essence, whatever the purpose of your mortgage application, the process works much as it would with a loan from a bank, except it’s quicker and easier.