Private money, also known as private mortgages, can be a viable option for borrowers who may not qualify for traditional lending due to financial challenges. While some may perceive private mortgages as a last resort, they can actually be used as a stepping stone towards achieving a longer-term financial goal.
One reason why borrowers turn to private money is to use it as a temporary solution to financial challenges that can be remediated in a shorter period of time, usually within 12 to 24 months. These borrowers may have the earning power to qualify for traditional lending down the road but need time to fix certain financial issues.
These financial challenges can include insufficient reported income from self-employment, high debt ratios, low credit scores, tax arrears, or a low down payment for a property. By securing a private mortgage, borrowers can access the funds they need to address these challenges and work towards qualifying for traditional lending in the future. For example, a borrower with excellent finances may not have the sufficient down payment to acquire a property. With a private mortgage, they can borrow at a higher loan-to-value ratio than what a traditional lender would allow and refinance back to a traditional lender once the property appreciates in value.
However, there are also borrowers whose financial challenges may be more difficult to remedy within a 24-month timeframe. These borrowers may have income, debt, or credit issues that cannot be easily fixed, making it harder for them to obtain traditional lending. While some may still be able to secure private funds, this type of lending is considered higher risk as the exit strategy may not be as clear, and the process may take longer.
In Summary
Private mortgages can be a valuable tool for borrowers who need time to remedy certain financial challenges and work towards qualifying for traditional lending. By using private money as a stepping stone towards a longer-term financial goal, borrowers can access the funds they need to address their challenges and ultimately achieve their desired outcome. It’s essential to work with an experienced private mortgage lender who can guide borrowers through the process and help them navigate their options.
