When Are Mortgage Lenders Better Than Banks?
An individual or business looking to purchase a home or other real estate has two primary options for obtaining financing: a traditional bank or a private mortgage lender. Often, the choice between a private lender and a commercial bank comes down to what type of property an individual is seeking to purchase and the status of his personal finances. While an individual's local or other traditional bank is often a good choice, there are a number of instances when mortgage lenders are likely to offer a better option.
Simplicity Is Not the Name of the Game
Traditional banks are an optimum choice for individuals who have a straightforward and simple property to finance, and who do not anticipate any problem with obtaining a mortgage loan. Banks prefer offering loans on these simplistic deals because they result in stable value and income. In general, a bank’s financing is frequently tied to a property’s debt service coverage ratio; if the income on the property is not in excess of the property’s mortgage payments, the bank typically refuses to make a loan available.
Alternatively, while private lenders prefer a simple deal, such as a straightforward residential or commercial property purchase, they also make loans available for more complicated properties, such as shopping malls, and are generally more willing to consider borrowers who may have some difficulty meeting a bank's mortgage requirements. In reality, a property deal that is more complex frequently provides a borrower with the opportunity to make more money. Private lenders also factor in how they may be able to profit by taking possession of the property in the event of the borrower defaulting on the loan.
Origination Fees and Interest Rates
On average, a retail or commercial bank charges noticeably lower origination fees and interest rates than a private lender. Such fees and rates are directly proportional to, and comparable with, fees that other commercial banks charge for the same or similar kinds of relatively safe and simple property deals. In this regard, private lenders charge more in fees and rates because they are generally providing loans for riskier deals. The greater the amount of risk, the more compensation private lenders demand.
Private lenders also tend to have higher fees because the capital used to provide borrowers with loans is gleaned from investors looking for substantial returns on investment, while commercial banks have access to extremely low-cost federal sources of funding.
The Loan-to-Value Ratio
The loan-to-value (LTV) ratio varies in total, but commercial banks generally provide borrowers with anywhere from 65 to 80% of a property’s value. Private lenders almost always put a cap on their loans at 65%, though there is not as much of a discrepancy as may appear at first glance. For example, a bank, nearly 100% of the time, provides a loan based on the current value of the property in question, while private lenders are likely to offer the borrower a loan of up to 65% of the property's value after it has been remodeled or rehabbed. In this way, the loan offered by the private lender stands to come out larger overall, and therefore may be a better deal when the buyer plans to do substantial repair or remodeling work.
Time to Execution
With all other circumstances being normal, commercial banks possess the power to wrap up a loan and make the funding available in one month to 45 days. In reality, however, the time between the loan's origination and the date it is executed is usually somewhere between 60 days and three months.
Private lenders are able to move much more quickly, often closing out loan payments within a few weeks, or even days, of the origination process. Private lenders are also generally able to provide borrowers with a highly accurate idea of exactly how long it takes to get the money in hand. Therefore, for borrowers looking to obtain a mortgage loan quickly, private lenders usually offer the best option.