Difference between prime mortgage lenders and private lenders

When buying a new home or commercial real estate property, individuals and businesses use mortgage loans instead of making a single upfront payment.

Mortgage loans are spread over a defined period with a set of predefined payments. The borrower is required to make regular payments until the loan is fully paid. During the repayment period, the lender retains ownership documents of the real estate property until the mortgage is fully paid.

When taking a mortgage loan, borrowers can choose between a mortgage lender and a private lender.

A Mortgage Lender

A mortgage lender can either be a prime mortgage lender or a subprime mortgage lender, depending on the borrower’s credit score. Borrowers with a credit score of 620 and above qualify for a prime mortgage, while borrowers with a credit score below 620 can qualify for a subprime mortgage.

A Private Lender

A private lender, on other hand, can be a friend, family or private investor who provides loans, with the expectation of earning a decent return and passive income on their investment. A private mortgage lender provides home loans at a slightly higher interest rate than traditional mortgage lenders.

Who is a Prime Mortgage Lender?

A prime mortgage lender is a lender that provides mortgage loans to borrowers with a credit score of 620 to 650, or higher, and with an income that is three or four times greater than the mortgage payments.

Prime mortgage lenders are required to meet state and federal mortgage regulations, including those set by government agencies such as Freddie Mac and Fannie Mae. Prime mortgage lenders only approve borrowers with the best credit history, and they require borrowers to pay a down payment of 10% to 20% of the purchase price of the home.

Features of Prime Mortgages

Generally, prime mortgages are offered at a low-interest rate that is equal to the current prime rate set by the Federal Reserve. It is the rate the Federal Reserve offers to commercial banks, and subsequently, banks use this rate to lend to their best customers.

Borrowers who are awarded prime mortgages save thousands of dollars in monthly mortgage payments compared the amounts paid by subprime mortgage borrowers. If the down payment paid by the borrower is high enough, the borrower will not be required to pay monthly private mortgage insurance, resulting in more savings.

Qualifying for a Prime Mortgage

Prime mortgage lenders only provide home loans to borrowers with high credit scores. When there is adequate money supply, prime mortgage lenders award mortgages to borrowers with a credit score of 620 to 650. Borrowers with a credit score above 650 almost always qualify for the loan. When the money supply is tight, banks prioritize borrowers with a high credit score of at least 690. Borrowers with a credit score below 690 may apply for sub-prime mortgages or use loans from the Federal Housing Association, which charges an interest rate that slightly higher than the Federal prime rate.

Who is a Private Mortgage Lender?

A private mortgage lender is a private investor who is in the business of providing home loans to borrowers. A private mortgage is created by a private individual such as a friend, family member, or business, and it has dozens of benefits if it is executed correctly. A private mortgage can create a win-win for the parties involved, where each party derives financial gain without taking on too much risk than they can handle. On the borrower’s side, a private mortgage helps bypass the complexities of getting approved by bank mortgage lenders. On the lenders side, a private mortgage provides a return and passive income in the long-term until the borrower makes the final mortgage payment.

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How to Structure a Private Mortgage

A private mortgage loan should be well-documented so that the terms of the loans are clear. The loan agreement protects both parties in case either party backs out of the transaction before the agreed period. Here are some of the details that should be included in a private mortgage loan agreement:

  • Expected date of payment (Date of the month)
  • How payments should be made (Direct deposits or electronic transfers)
  • Collateral required for the loan
  • Conditions for loan prepayments and any associated penalties
  • What happens in the event of delinquent payments (penalties, foreclosure, etc.)
  • Grace period for repayment

When preparing private mortgage documentation, both parties should enlist professional help to ensure the agreement is legal and enforceable. For example, the parties should involve a real estate attorney and tax consultant to prepare the required agreements. The agreement should provide details on how insurance premiums and annual taxes are going to be paid. It should also disclose the outcome of non-payment. For example, if the borrower misses multiple payments beyond the allowed period or in a worst-case scenario, the lender can move to take over the property through foreclosure in order to recoup the outstanding balance of the private mortgage. 

Qualifying for a Private Mortgage

A private mortgage has fewer qualification requirements than traditional mortgages. For example, traditional mortgage lenders require borrowers to provide a lot of documentation to prove their ability to repay the mortgage. Borrowers must also have high credit scores, and any history of missed payments or unstable income can lock them out of the loan. In the case of private mortgages, borrowers with an insufficient credit history or inadequate income can get home loans from friends or private investors with ease. The borrower may also obtain a private mortgage loan on the basis of their relationship with the lender, making the process less rigid. Creating a formal loan agreement can help safeguard the relationship so that both parties fulfill the terms of the loan.

Prime Mortgage Lender vs. Private Mortgage Lender Comparison

When it comes to providing mortgage loans to potential homeowners, prime mortgage lenders are generally difficult to deal with compared to private mortgage lenders. Prime mortgage lenders are required to operate within the existing federal and state financial regulations, as well as government programs that provide operating requirements to banks on individuals and businesses that can borrow, and the credit profiles of these borrowers. Also, bank lending procedures tend to be complex, and they generally consider the borrower’s credit history, incomes, credit scores, etc.Prime mortgage lenders lend to the best customers with the highest credit scores, and this may lock out a lot of good borrowers with insufficient credit history or below average credit scores.

Although private mortgages are required to operate within the federal and state regulations, they have greater flexibility to determine who they can lend to, and the terms of the loan. These lenders are not restrained by the traditional lending procedures, and they can overlook background checks such as credit history and employment status in favor of more creative methods of qualifying income. Also, private lenders can customize the mortgage loan using a set criteria such as debt to income ratio and credit scores to create a mortgage loan that fits the borrower’s needs.

If you are contemplating becoming a new owner of an apartment, townhouse, condominium, or a house you are not alone. Learn everything about mortgages in Canada here!

Frequently Asked Questions About Prime Mortgage Lenders and Private Lenders

Is it better to get a mortgage from a prime mortgage lender or private mortgage lender?

Prime mortgage lenders are generally less expensive, but it is difficult to get a loan approved if you do not have sufficient credit history or your credit score is below 620. It is easier to qualify for a private mortgage loan, but it charges a higher interest than a prime mortgage lender.

Are private mortgage lenders safe?

Private mortgage lenders are generally safe, and they can help you get a mortgage loan quickly and at better terms. However, due to the high risk of default, private lenders charge a higher interest than banks, and if the borrowers fall behind in making mortgage payments, the lender can foreclose on the home pledged as collateral.

How can I get a private mortgage loan?

If you are looking for a private mortgage lender, you should build a strong network of potential mortgage lenders comprising wealthy friends, family members, private investors, real estate agents, etc. You should prepare a strong proposal for your project, and show them the wow factor on how the proposal benefits them.

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Josiah Mwangi

Josiah Mwangi is a freelance writer specializing in finance, business and real estate. His work has been featured on the Huffington Post, Finance Blog Zone, and other top publications