One of the most important by-products of the recent financial crisis was the disappearance of the non-prime alternative mortgage financing products. In the past when there were no high credit score, borrowers purchasing or refinancing property could qualify for alternative mortgage loans that compensated for the added risk with increased rates of interest. Lenders that made these loans demanded 1-3% higher rates of interest than those that were available on the prime loans. Higher loans of interest were considered sufficient for compensating for the additional lending risk. In the present day market, the non-prime mortgages are available for around 5% to 7%.
However, such mortgages were eliminated by stringent financial regulations and the departure of the private secondary mortgage market. In some instances, the property does not qualify for the financing. This is common in the refinancing or purchase of the fixer-uppers or foreclosure properties that require considerable repair. Private mortgage financing loans provide a suitable alternative for properties or borrowers that do not qualify for prime loans. Private placement loans are mortgage loans that are funded through a non-institutional creditor like IRA retirement account, investment group, non-public pension fund, hedge fund, private lender or mortgage broker that is usually based on assets.
The loans require increased down payments or purchases or positions of substantial equity positions or refinancing. In a few instances, multiple properties can be cross-collateralized in the form of loan security. Private Placement loans are typically short term, lasting for 2 to 5 years. They are used as bridge or temporary financing, and not in the form of a permanent loan. Basic characteristics of private placement financing:
- The loan should be secured by the real estate – considering all kinds of properties including cross-collaterals
- Loan-to-Value (LTV) 50% to 70% of the projected value which is less in the case of vacant land
- The amount of the loan is between $100000 and $5000000 and more
- The typical term of loan is from 2 to 5 years with longer terms available
- The rates of interest are between 6% and 12%
- Quick funding for loans in as little as 5 business days!
Private placement loans are not applicable for all lending situations and are in a few instances used as long-term or permanent financing. They require solid equity with the interest rates being higher than that of the prime loans. However, such loans are useful if the prime lenders are unable or unwilling to lend as a result of the property or borrower requirements or if there is need for swift funding.