Private Mortgage Lenders: The Complete Guide

A Comprehensive Guide on Everything You Need to Know About Private Mortgage Lenders

 

While traditional banks dominate the mortgage industry, private lenders offer an alternative path to financing your dream home. Private mortgage lenders tend to have more flexible lending criteria, which can be a lifeline for those who don’t fit the traditional mold and struggle to qualify for conventional mortgages. 

 

In this guide, we’ll be going over everything you need to know about private mortgage lenders to help you decide whether they’re a good fit for your homeownership journey. 

 

What is a Private Mortgage Lender?

 

A private mortgage lender is an entity or individual that provides mortgage loans outside of traditional banking institutions like banks, credit unions, or government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. They are also known as non-bank or alternative lenders, and these terms are often used interchangeably within the mortgage industry. 

 

These lenders aren’t required to follow any regulatory guidelines when it comes to creating lending criteria and loan terms, so they have a lot more room to accommodate non-traditional borrowers. They can cater their lending products to better serve borrowers who may not qualify for traditional bank loans for various factors, such as poor credit history, self-employment, or non-traditional income sources. Private mortgage lenders can open the door to homeownership for those who’ve chosen an alternative path in life. Just because you’ve chosen an unconventional path, doesn’t mean it should get in the way of owning your dream home. 

 

How Do Private Mortgages Lenders Work?

 

Since private mortgage lenders aren’t bound by set guidelines like traditional banks are, securing a loan with one usually involves a direct negotiation between the borrower and the lender. Private mortgage lenders are typically more flexible, so they’re able to provide alternative lending options for borrowers who have different needs. With conventional loans offered by traditional banks, most of the loan terms are standardized regardless of the borrower. Private mortgage lenders can be more creative when coming up with their loan terms, which means that their loan options often cater to an underserved market of borrowers who are looking for a loan that fits their needs.

 

Not only are the loan terms more flexible but so are the qualification criteria. Many private mortgage lenders are willing to accept alternative forms of income verification to evaluate whether borrowers can repay the loan. These forms could include, but aren’t limited to, bank statements, rental income, significant asset portfolios, business profit and loss statements, and more. When it comes to private mortgage lenders, qualification requirements can vary significantly depending on how much risk each individual lender is willing to take when evaluating a potential borrower. 

 

Who Should Consider Private Mortgage Lenders?

 

Anyone with a unique circumstance who wouldn’t be able to qualify for a traditional mortgage should consider private mortgage lenders. This includes: 

 

  • Entrepreneurs 
  • E-commerce Professionals 
  • Small Business Owners
  • Self-Employed Individuals
  • Freelancers
  • Gig Workers
  • Foreign Nationals
  • Individuals With Multiple Streams of Income
  • Retirees 
  • Bad Credit Borrowers
  • High-net-worth individuals with liquid assets
  • Independent Contractors 
  • Self-Employed Lawyers
  • Doctors in Private Practice
  • Artists 
  • Real Estate Investors
  • Truck Drivers

 

Self-employed individuals like freelancers and gigworkers should consider private mortgage lenders.

 

How to Find A Private Mortgage Lender

 

With the internet at our fingertips, the easiest and fastest way to find a private mortgage lender is by using a search engine like Google. Depending on what kind of private mortgage you’re looking for, you can easily narrow down the results by adding the loan type to your search. By doing this, you’re more likely to find private mortgage lenders that have the type of loan that fits your needs. 

 

Additionally, you might find some lenders on online directories. These online directories act as a research platform to let you compare your lender options all in one place. However, keep in mind to thoroughly research each lender’s reputation and lending criteria before contacting any lenders. 

 

If you’re looking for a private mortgage lender that specializes in loans for self-employed individuals and real estate investors, contact us at Defy. We have plenty of loan options that can accommodate a wide variety of borrowers that don’t fit the traditional mold. 

 

Although finding a private mortgage lender typically requires more research and effort than going to a traditional bank, they have solutions that are tailored for borrowers who have unique situations or need a quick closing. 

 

Types of Loans Offered by Private Mortgage Lenders

 

Since private mortgage lenders have more flexibility with their lending criteria and loan terms, not all private mortgage lenders will offer the same types of loans. While we can’t speak for other lenders, we’ve listed the loan types we offer at Defy below to give you a better idea:

 

  • Debt-Service Coverage Ratio (DSCR) Loans
  • Bank Statement Loans
  • Profit & Loss (P&L) Loans
  • Fix & Flip Loans
  • Construction Loans
  • Asset Depletion Options
  • Interest-Only Options

 

Keep in mind that not all private mortgage lenders will offer all the loan options on this list. If there’s a specific loan type you have in mind, it’s important to connect with your desired lender to make sure it’s something they offer. 

 

Pros and Cons of Using a Private Mortgage Lender

 

When it comes to looking for a mortgage, there will always be pros and cons, and using a private mortgage lender is no exception to that. To help you make a more informed decision on whether you should consider using a private mortgage lender, here are some pros and cons to consider:

 

Pros:

 

  • Opens up the door to homeownership for a wider variety of people who can’t qualify for a traditional mortgage
  • More flexible when it comes to lending criteria and loan terms
  • More options for entrepreneurs and self-employed individuals to verify their income without needing to provide tax returns, W2s, or pay stubs
  • More flexible underwriting standards for those with liquid assets or foreign nationals
  • Typically faster approval process 

 

Cons:

 

  • Typically higher interest rates
  • Depending on the lender, there could be higher closing fees
  • Some lenders may charge prepayment penalties for paying off the loan early

 

Private Mortgage Lenders vs. Traditional Mortgage Lenders

 

Private mortgage lenders and traditional mortgage lenders represent two distinct ways to obtain financing for real estate purchases. Understanding the differences between these two options can help you make informed decisions based on your financial goals and circumstances.

 

Traditional mortgage lenders, such as banks and credit unions, are institutions that specialize in providing mortgage loans and other retail banking products to consumers. These lenders typically have to follow strict underwriting guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac, as well as regulations set by banking authorities. As a result, traditional mortgage lenders tend to have strict lending criteria with structured loan terms, which aren’t ideal for borrowers who veer outside of these requirements.

 

In contrast to traditional mortgage lenders, private mortgage lenders consist of individuals or non-bank entities that provide mortgage loans outside of the conventional banking system. These lenders include specialized financing companies, hedge funds, and other private capital groups. Rather than mass-marketed loan products, private lenders focus on customized lending solutions tailored to each borrower’s unique financial circumstances. 

 

Many private lender personnel possess previous experience in large banks, which has informed their understanding of the demand for more flexible and adaptable mortgage offerings. Private mortgage lenders are often more flexible in their underwriting criteria, making them a great option for borrowers who may not qualify for loans from traditional lenders due to their type of work or credit score. Rather than only considering income that’s easily documented by W2s, pay stubs, and tax returns, private mortgage lenders offer alternative income verification using bank statements, P&L statements, rental income, and more. 

 

Not only that, but they also offer a wider variety of loan types to cater to those in unique situations and have relationships with other service providers who also provide customized services – can be anywhere from property management, wealth advisors, realtors, etc. Overall, private mortgage lenders can provide quicker approval processes and more personalized loan terms tailored to your individual needs. 

 

Private mortgage lenders don't have to follow the same guidelines as traditional lenders.

 

Private Mortgage Alternatives

 

If you’re finding that a private mortgage isn’t for you, there are some alternatives you can consider. While not as flexible as private mortgages, these are other ways that you can secure a home or unlock equity in your existing home:

 

  • Federal Housing Administration (FHA) Loans: A government-backed loan type that allows first-time homebuyers and those with lower credit scores to qualify for a mortgage. 
  • Home Equity Line of Credit (HELOC): A revolving line of credit that allows homeowners to borrow against the equity in their home as needed, with interest rates typically variable.
  • Home Equity Loans: Provide homeowners with a lump sum of money borrowed against the equity in their home, typically with fixed interest rates and set repayment terms.
  • Cash-Out Refinancing: This involves replacing an existing mortgage with a new one that has a higher loan amount, allowing homeowners to receive the difference in cash while adjusting their mortgage terms and interest rates.

 

FAQs

 

What is Private Mortgage Lending?

Private mortgage lending is a form of financing where an individual or entity, outside of traditional banks, provides funds to purchase a property. Unlike banks with standardized guidelines, private lenders set their own terms and criteria, offering flexibility for borrowers who might not qualify for conventional mortgages.

 

What are Private Mortgage Lenders?

 

Private mortgage lenders typically refer to specialized mortgage lenders, but can also include private investors, wealthy individuals, and even friends and family. They offer alternative financing options and aren’t required to follow the same lending rules and regulations as traditional banks. 

 

What’s the Difference Between a Private Mortgage Lender and a Bank?

 

The main difference between a private mortgage lender and a bank is the flexibility in the lending criteria and loan terms. Banks are required to follow standards set by Fannie Mae and Freddie Mac, which results in stricter lending criteria and more standardized loan terms. Whereas private mortgage lenders aren’t bound by these rules, so they can be more accommodating and flexible when it comes to lending criteria and loan terms. 

 

What Are the Pros and Cons of Getting a Private Mortgage?

 

Pros:

  • Easier qualification for borrowers facing challenges with traditional lenders
  • Flexible terms 
  • Potentially faster approval process
  • Tailored solutions to fit specific needs

 

Cons:

  • Potentially higher interest rates compared to conventional mortgages
  • Potentially higher down payment requirements

 

Do Private Mortgage Lenders Require a Down Payment?

 

Yes, private mortgage lenders typically require a down payment, often ranging from 10% to 30% or more of the property value. This can vary depending on the lender and your specific situation.

 

Do Private Mortgage Lenders Check Credit Score?

 

While private mortgage lenders may have more flexible credit score requirements compared to banks, they often still consider your credit history as part of their approval process.

 

Can I Get a Loan From A Private Mortgage Lender With Bad Credit?

 

While possible, it can be challenging to get a loan from a private mortgage lender with bad credit since they usually check your credit score. If you have other compensating factors, like a large down payment, a significant asset portfolio, or a co-signer with good credit, lenders may be more willing to consider you as a borrower with bad credit. 

 

Can I Get a Loan From A Private Mortgage Lender If I’m Self-Employed?

 

Yes! Private mortgage lenders can be a good option for self-employed individuals who might struggle to qualify for traditional mortgages due to irregular income. Many private mortgage lenders accept alternative forms of income verification beyond standard income documents like W2s, pay stubs, and tax returns. 

 

Should I Get a Private Mortgage?

 

The answer to this question will depend on your individual factors like your unique circumstances and financial goals. Before deciding on whether a private mortgage is right for you, evaluate the pros and cons and consider whether it would be beneficial for you. 

 

Where Can I Find a Private Mortgage Lender?

 

You can find private mortgage lenders by searching for them online. You may also be able to find them through mortgage brokers or even your own personal network through referrals. 

 

Who Offers Private Mortgages?

 

Private mortgages are offered by specialized non-bank lenders. While you might be able to find other types of private mortgages offered by individual investors or family and friends, private mortgage lenders in the mortgage industry usually refer to specialized lenders offering alternative mortgages. 

 

Are Private Mortgage Lenders Safe?

 

Yes! Private mortgage lenders are safe as long as you choose a reliable and experienced lender. 

 

Can You Refinance a Private Mortgage?

 

Yes! You can refinance private mortgages depending on the lender and the terms of your loan agreement. 

 

Are Private Mortgage Lenders Legal?

 

Yes! Private mortgage lenders are legal. 

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