Understanding Your Private Home Mortgage Loan Options

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Contents

Getting approved for a Private Home Mortgage Loan can feel overwhelming with all the different lenders, loan types, and financial considerations involved. While large banks are a popular first stop for many homebuyers, did you know there are also private home mortgage lenders that may offer competitive rates and flexible terms? Join me as we dig deeper into the top options available.

Who are private mortgage lenders?

Private mortgage lenders operate independently from large banks and other primary mortgage market institutions. This means they don’t sell their loans to Fannie Mae, Freddie Mac, or Ginnie Mae in the secondary mortgage market. Instead, private lenders hold the loans in their portfolios.

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Some key things to know about private mortgage lenders:

  • They typically have more flexible qualification standards than big banks and may consider applicants with lower credit scores, higher debt ratios, or other imperfect credit profiles that large banks would reject.
  • They can often make lending decisions faster than banks since they don’t have to get loan approvals from a secondary investor.
  • Loan programs vary by each lender but may include specialty loan types like adjustable-rate mortgages (ARMs), interest-only loans, bank statement loans, or loans using alternative income/asset documentation methods.
  • Rates can potentially be lower than conventional loans, especially if you qualify for one of the specialized programs, but fees tend to be higher overall.
  • The application and approval process is usually streamlined compared to a large bank but involves directly working with the private lender as the sole point of contact.

Some common types of private mortgage lenders include small local/community banks, credit unions, mortgage brokerages, and niche online lenders. The largest distinction is they operate outside of the government-backed conventional conforming market.

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How do private mortgage rates compare?

One of the main potential advantages of a private lender is rate competitiveness compared to large banks. However, rates will vary between lenders and depend on your financial details and the specific loan program. Some general comparisons:

  • Conventional conforming rate: Typically, the benchmark rate is published by Freddie Mac each week. For a 30-year fixed-rate conventional conforming loan through a large bank.
  • Private rate: Will be comparative or potentially lower than the conventional rate. It usually depends on factors like loan size, program type, and income/credit profile. It may be a 15-year or 30-year fixed-rate or an adjustable-rate option.
  • Points: Private lenders tend to charge more points and origination fees than large banks for conventional loans. Points are effectively pre-paid interest and lower your rate the more you pay.
  • Cost comparisons: Always look at the total cost of funding over the life of the loan, not just the rate. Private loans can have higher costs, offsetting any rate savings on smaller balances.

While private lenders advertise low rates, only a customized quote based on your full financial profile will reveal the true cost differences for your situation. Private lenders may have programs that deliver real savings versus a bank if you qualify.

What are the underwriting guidelines?

Understanding the loan qualification guidelines is important before applying with a private lender. Their guidelines tend to focus more on your ability to repay the debt than just your credit history alone. Here are some common components private lenders examine:

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Credit Scores

Most private lenders will accept borrowers with credit scores as low as 620, compared to 640-660 at many banks. Scores above 740 will qualify for their best rates. Derogatory marks like late payments, judgments, or bankruptcies require additional compensation factors.

Debt-to-Income Ratios

Maximum debt-to-income (DTI) ratios are usually higher at 43-50%, meaning you can devote more of your gross monthly income to debt payments. Banks are typically around 36-43%.

Employment History

Continuous full-time work in the same field for at least two years is the minimum. Self-employment requires additional documentation, and income/assets must be well-supported.

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Assets and Reserves

Higher down payment requirements, often 5-20% versus 3-5% at banks. Minimum 1-3 months’ reserves of living expenses after closing are also assessed.

Credit File Depth

A longer credit history of at least three open accounts reporting for 24+ months carries more weight versus just a few newer accounts. Authorized user status reduces the impact of newer trade lines.

Private underwriting aims to provide flexibility while still maintaining prudent risk standards. Fulfilling these guidelines increases your chance of approval and securing a competitive rate. Presenting strong support for income, assets, credit, and reserves is key.

Loan Programs to Consider

Private mortgage lenders tailor their products for different borrower needs beyond traditional 30-year fixed rates. Here are some of the most common alternative programs to explore:

Adjustable-Rate Mortgage (ARM)

An ARM gives a lower starting rate that adjusts periodically based on an index. Rates change in small increments, often just 1/2-1%, so payment increases remain manageable. Best for shorter-term homeowners.

Interest-Only Loan

For a set period like 5-10 years, your payments only cover accrued interest but not principal. This lowers payments but extends amortization. It is ideal if planning to refinance within the term.

Bank Statement Loan

Doesn’t require tax returns or other income documentation if your asset account statements verify your ability to repay—a good option for self-employed or those with variable income streams.

Portfolio Loan

Higher-balance loans outside agencies’ conforming limits. Private lenders have greater capacity beyond $647,200. It may include blended rates and larger multi-unit properties.

Bridge Financing

Short-term (6-36 months) for financing between home purchases when selling one property before buying another. Interest-only payments keep costs down temporarily.

Choosing the right product is as important as the rate. Consider your goals carefully to align with a private lending program’s risks and rewards. A knowledgeable loan officer can help determine the best fit for each applicant.

Applying for Private Mortgage Financing

Now that you understand your options, here is a brief overview of the typical private loan application process:

Pre-Approval

Submit basic application and docs for an indication without a hard credit pull. Lenders can guide you on what’s needed to get final approval, so no surprises.

Formal Application

Once you find a home, formally apply by providing a detailed application, income/asset documentation, credit reports/scores authorization, and an initial underwriting fee.

Underwriting/Review

Underwriters assess your full financial profile compared to guidelines. May request additional clarification or documentation during this process which can take up to 30 days.

Clear to Close

Once approved, you will receive clear terms and fees, including any points required upfront. The rate is locked for 30-90 days as the closing process begins contingent on appraisal and title search.

Closing Process

Approximately two weeks before the scheduled closing date, you will provide final proof of insurance, pay the remaining fees, and sign loan documents during the closing. Funds are disbursed upon recording.

Be prepared to deliver all requested paperwork promptly. Delays lead to potential rate lock expiry fees or else being re-quoted at higher market rates. Choose a responsive local lender that can streamline the application experience.

Weighing the Pros and Cons

Here are some key pros and cons to consider when exploring private mortgage financing:

Pros

  • Potentially more flexible guidelines and underwriting
  • Competitive interest rates
  • Personalized service from knowledgeable local lenders
  • Specialty products beyond generic bank offerings
  • Faster pre-approvals and closing timelines

Cons

  • Higher fees eat into savings from reduced rates
  • No federal protections or recourse if the lender goes bankrupt
  • Rigorous underwriting standards still apply
  • Limited refinance/modification options post-closing
  • Less transparency on true costs vs large bank lending

A private loan makes the most sense when you don’t quite qualify at a big bank but have strong credit/income fundamentals otherwise. It’s important to diligently compare shop fees/rates between multiple private lenders too.

Frequently Asked Questions

Here are answers to some commonly asked questions about obtaining private home financing:

Q: How is private lending different than getting a mortgage through a bank?

Private lenders are more flexible in their underwriting guidelines, don’t sell the loans on the secondary market, offer niche products, and handle the origination process internally without intermediaries. However, they charge higher fees, hold the risk on their balance sheet, and don’t provide the same post-closing support as large bank servicing departments.

Q: What is the down payment needed for a private mortgage?

Private lenders will often accept less than 20% down payment which is common for conventional loans through banks. However, they typically require a minimum of 5-10%.

Q: How long does the application and approval process take with a private lender?

The application and underwriting timelines can vary depending on the private lender, the current volume of applications, and the complexity of the borrower’s financial details. In general, expect it to take 2-4 weeks from initial pre-approval to final underwriting approval once a complete application is submitted. The lender may be able to provide estimated timelines during the pre-approval stage.

Q: What credit score and debt-to-income ratio do I need for a private loan?

Most private lenders will consider borrowers with credit scores as low as 620 but will offer the best rates to those with scores over 740. The maximum debt-to-income (DTI) ratio accepted is usually around 43-50% of your gross monthly income compared to 36-43% at many banks.

Q: Is the private lending process much different than obtaining a conventional loan?

While the overall home lending process is similar between private and conventional loans, there are some key differences with private lending. Private lenders have more flexible underwriting, don’t sell the loan on the secondary market, offer niche products beyond 30-year fixed rates, and coordinate the entire origination internally rather than outsourcing parts of the process.

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