Are you planning to finance the purchase of a home? If so, you will want to thoroughly explore your loan options so you can be sure you are selecting the type of loan that is best suited to you and your needs. One of the first choices you will need to make is whether you want to obtain a traditional mortgage or pursue a loan through private lending. In order to best make this choice, you first need to understand the differences between these two loan types.
What are Traditional Mortgage Loans?
Traditional mortgage loans are long-term loans that have been issued by either a bank or a credit union for the purpose of purchasing a home. Traditional mortgage loans typically require a down payment of 10 to 20 percent of the total home value, though some programs allow for a down payment of as little as 3.5 percent. If you take out a mortgage loan with a smaller down payment, however, you will likely be required to pay a mortgage insurance premium until the equity on your home reaches 10 to 20 percent. This will increase the overall monthly cost of your loan.
Mortgage loans are typically set up to take 30 years to pay off, though shorter terms of 15 years are also available. Due to the long-term commitment involved, mortgage loan lenders are very critical of a borrower’s financial profile. As such, the process involves obtaining a significant amount of paperwork while also demonstrating a good credit score and the ability to make monthly mortgage payments. Due to all of the paperwork and other steps involved with the process, it can take several weeks or even months to close on a home mortgage loan.
What is Private Lending?
A private loan is a short-term loan that is issued by a private lender. Loan terms for a private loan may be as little as six months or may be up to a couple of years. Therefore, private loans are typically obtained by those who do not plan to hold onto the loan for very long, such as those who are rehabilitating or remodeling a property with the goal of turning around and selling it after the work is done. As such, lenders backing private loans are generally more concerned with the before and after value of the property. If the property shows promise, you will have a great chance of obtaining a private loan.
Private lenders are typically less concerned about credit scores than mortgage loan lenders. If you have at least 20 percent down and the capital to pay the interest on the loan, you will likely be approved if you present a solid plan regarding how you plan to pay off the loan. Due to the streamlined process involved with obtaining approval for a private loan, it generally takes only a week or two to close with a private lender. On the downside, private loans generally come with a higher interest rate than home mortgage loans.