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Private Mortgage Logic
“Private Mortgage Financing Is
Make Sense Lending”
As things start getting back to speed here in the early part of January, 2013, I wanted to talk a bit about private mortgage lending and how it should be looked at as a source of financing.
Private mortgages fall into what we call the sub prime lending category which basically includes all non bank or institutional lenders that do not price their financing off the prime rate.
In many cases, private money is a secondary form of financing, but that doesn’t have to be the case, especially when time is of the essence.
You will see references to private mortgages as hard money as well and there is many degrees of hardness to consider depending on the financing request and the lender.
And perhaps this is the best place to have a discussion on what I’m referring to as private mortgage logic.
Hard money definitions, for the most part, are focused in on equity lending where the equity in real estate is the primary consideration for making a loan. The term hard can relate to a number of different things depending on who you’re talking to such as hard to find money, hard to work with if payments are not made, hard cost or higher cost of funds and so on.
As a private mortgage broker, the one hard money notion that makes very little sense to me is that money can be procured from a private lender where the risk of loss to the lender is disproportionately higher than their potential return.
The idea here is that true hard money can be acquired for situations that don’t make any sense from a risk and reward point of view, but because a high interest rate will be charged, private investors will still advance money.
One of the most common examples of this is the $0 down mortgage to someone with some combination of poor credit and cash flow.
While it is certainly possible to get this type of private mortgage, its not probable, and the reason why is that it doesn’t make economic sense for both the borrower and the lender.
For the most part, private loans are secured by equity in real estate so in the event of default the private lender has the ability to foreclose on the borrower and recoup the money advanced without it costing them any money.
This is what we call “make sense lending”.
And each situation is going to be different.
There will be situations where the loan to value considered by a lender will be higher than the average and situations where its also lower.
But what is true far more often than not is that each deal must stand on its own merits and if the risk of lending and the cost associated with that risk make sense to both the borrower and lender, then its very likely financing will be able to be arranged.
When this is not the case, the money will certainly be “hard” to find.
Some people conjure up images of private lending similar to some type of loan shark where if you don’t get paid someone is going to break your legs and high risk lending can be justified in this fear of retribution fashion.
But in reality, this couldn’t be further from the truth, at least in anything I have seen or been a part of over many years of working in the mortgage business.
Private lending exists because their is a viable need for it in the market place that is not being met by banks and institutional lenders. This is true for both residential and commercial property lending.
Private lenders are investors that choose private mortgages as an investment vehicle no different than any other type of investment where the potential return and investment risk or weighed before any money changes hands.
And if a lending scenario is presented that allows the lender to acceptably manage their risk of loss in exchange for a cost of financing acceptable to the borrower, then a loan agreement can be entered into.
The bottom line here is that lending requests that don’t make business sense or the don’t have any common sense to them will not likely attract private money.
Understanding this can save you a lot of time chasing after something the highly unattainable.
That being said, there are also no absolute rules when it comes to private lending either as individual lenders can also do whatever they choose. But once again, just because something is possible doesn’t make it probable.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel