Characteristics of Private lenders

Private lenders generally have some common characteristics, regardless of whether the loan is made directly by the individual or indirectly through a loan broker:

♦ Most loans are on single-family dwellings because this type of property is most familiar to the typical private investor, and also because the size of the loan is relatively modest.

♦ The vast majority of loans by private individuals are made within the geographic areas most familiar to the lender.

♦ Private lenders are for the most part less formal, and therefore make highly subjective loan decisions, especially when making a loan directly to a borrower. On the other hand, mortgage brokers who represent private lenders are usually very sophisticated.

♦ High interest rates are normally charged, due to the high risks involved. However, exceptions exist in seller carryback transactions where a relatively low rate may be acceptable due to offsetting benefits. To compensate for, say, a 7% rate, a seller might either increase the price of the property or be willing to settle for the lower rate when the rates quoted on new first loans are so high that buyers are unwilling to pay high rates on the junior loan.

♦ Most private lenders operate in the second trust deed market. As pointed out previously, this is often created by the dictates of the marketplace, when a seller carries back a second deed of trust in order to close the transaction. Frequently these second loans are thereafter sold to investors, usually at a discount, when the seller needs cash.

♦ Private lenders rarely make prime loans and almost never get involved in construction financing. (Prime loans are those that involve the least risk to lenders and are usually first liens.)

♦ The term of a private loan is usually short and often calls for a balloon payment. Six months to five years are the most common maturities.

♦ Monthly collections are frequently performed through a mortgage company or financial institution, though individual lenders may in some cases collect themselves. The setup and collection fees charged by commercial and savings banks are relatively small, since these institutions are interested in obtaining the customer's account. Some offer free collection service when the customer maintains a minimum balance in a savings or checking account.

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