Homeowners Turn to Private Lenders As Banks Get Tougher

Before the big banks got into the act, the main source of  mortgage funding was private lending, also referred to as “hard money”.  Now, as banks require accurate appraisals, high downpayments, and verified income with good credit scores – more and more would-be homeowners with risky credit are turning to the private money industry.

According to the San Jose Mercury News, at least 11,008 private mortgages were funded statewide in 2007, worth a total of $3.3B.  This is down from $4.96B in 2006?  Why?  This is partially due to the cooling of the real estate market, but also partially due to the requirement private lenders have for equity in the home.  Private lenders usually do not play unless there is at least 20-30% equity in a home, and with equity eroding as prices fall, this has been hard to come by in this market.   The Merc also goes on to tell us that this data was reported by the California Department of Real Estate, which cannot track the activities of private money lenders outside of the sphere of regulated mortgage brokers. 

Private lenders also are several interest points higher than traditional banks, which are higher than the new FHA loans offered. Those who qualify for FHA are much better off going this route.

One lender, DFI, advertises on its site a NOD bailout plan for 10-11% interest with a minimum 65% LTV, or loan-to-value.  The site goes on to say that the quality of the collateral and amount of equity are the primary considerations for a loan.  These loans are interest only with a balloon due at maturity, and they do carry a prepayment penalty. 

Private money may also be risky.  Several private money lenders have been arrested for running fraudulent operations in recent months, so if private money is the solution you choose, it makes sense to do a thorough investigation of the firm you plan to engage with.