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Archive for September, 2015

Private Money Lending

Individuals, who have a great deal of money at their disposal, may specialize in lending it to the people who find it hard to qualify for loans provided by banks and credit unions. The inability to qualify for loans provided by the aforementioned entities can be pegged down to an impending foreclosure, the need for hard money commercial construction loans, or requiring cash to finance the purchase of a property whose value cannot be appraised accurately. Such borrowers pose a great deal of risk to the traditional lenders due to a variety of reasons. Hence, it goes without saying that lenders, who provide loans to high risk individuals and businesses, expect adequate compensation as a reward for the risk assumed. Despite stringent conditions imposed by private lenders, borrowers, who have fallen on hard times, try to seek loans that are usually hard to come by.

The Need for Private Money Lending

Although, the government is providing a number of facilities to help people avoid impending foreclosures, the eligibility criteria for qualifying for such loans may preclude the borrowers from obtaining the same. For instance, borrowers whose loans are not owned by Freddie Mac or Fannie Mae cannot opt for a loan modification or a mortgage refinance under the Making Home Affordable Program. Again, this program is only meant for people whose loans are insured by the FHA (Federal Housing Administration). Borrowers, who are delinquent or have delayed payments by more than 30 days in the past 12 months, will not qualify for a mortgage refinance under the Home Affordable Refinance Program (HARP), despite the loans being owned or guaranteed by Freddie Mac or Fannie Mae. Hence, such borrowers would be forced to approach private money lenders to avert foreclosures by refinancing their mortgage. The loan to value ratio, i.e., ratio between the amount of loan and the appraised value of property, needs to be low. This is possible only if the homeowner has sufficient equity in the house. The money is lent for the purpose of refinancing a primary mortgage, and the borrower may try and purchase points in order to reduce the rate of interest on the borrowed sum. In other words, the private money lender ensures the safety of the money that is lent, by providing a loan against a property that has substantial market value. Borrowers, who satisfy these stringent conditions, can hope to obtain a loan and thwart foreclosure proceedings.

These lenders also provide commercial construction loans to businesses as an alternative to bank loans for making the requisite improvements to an existing structure or for financing the construction of a new building. Again, these are collateral based and the reason for approaching a hard money lender may be attributed to the business being a startup and not having supporting financial documents, justifying the ability of the firm to make good its commitments.

A private lender provides a loan, that is typically secured by an asset, that assures him of recovering the loan by auctioning the repossessed asset. The rate of interest is also higher than the interest charged by banks and credit unions. The high rate of interest is a compensation for the risk assumed, since risk and reward should be comparable to make good business sense. He generally expects the borrower to repay the loan as a lump sum. Lump sum repayments or balloon payments are the characteristic of this method, since the lender is unwilling to extend the repayment period or provide flexible repayment terms to the borrower.

Cosigner Responsibilities

You are in urgent need of a loan, but due to a bad credit history or no credit history at all, the loan granter requires you to get a cosigner for the agreement, before approving the amount. What does a cosigner mean?

In general terms, a cosigner is a person who takes equal responsibility of the loan payment as the primary borrower. Suppose a friend or relative of yours needs a loan for any purpose such as buying a house or a car, or getting a student loan, the loan company whom he approaches would normally require another person to be responsible to make sure the primary borrower repays the loan at the prescribed intervals. The person who takes this responsibility is known as a cosigner.

If you become a cosigner for a person, in case he fails to repay the amount back to the bank or the granter; you will be responsible for repaying the money. If the borrower is disabled or dies, leaving behind the business loan, auto loan, or home loan to be paid; you will have to pay the remaining amount. So, even though you do not possess the property or thing that was purchased on loan by the borrower, you still have to make the payments. Along with the loan; you will also have to pay the late fees, interest, collection charges, or any other miscellaneous charges involved.

What are Loan Cosigner Responsibilities?

Cosigning for another person is totally an act of great responsibility and risk. Therefore, it is very important that you keep some considerations in mind before entering into such an agreement. Make sure that the borrower, who may be any of your friend or close relative, has the required means of paying the loan back to the funding entity. It is not a good idea to enter into a cosigning agreement without assessing the borrower’s ways of payment.

One important thing to consider is that if the borrower is unable to repay the loan; it would not only have an adverse effect on the credit records of the borrower, but also will affect the credit ratings of the cosigner. And if this becomes the case, then the cosigner may face difficulties in the future regarding obtaining loans.

As a cosigner, you should also make sure that there is no collateral that is set as a security with the granter. Keep away from using property or fixed assets as a security. This might run the risk of ruining your future. If you are a cosigner, you should keep in touch with the granter at regular intervals. By doing so, you will ensure that the borrower is making timely payments.

Make a file to store all the loan related documents. Remember that you are also a part of the deal, and it is always better to record all details with you. It is recommended to even keep the least important document for further reference.

These are few important responsibilities that are to be considered before becoming a guarantor for someone. After you enter into a cosigning agreement, the debt details will reflect on your credit report too. If we take a look at the positive aspects of cosigning, if done with a trusted borrower; this can be of a great help for the borrower to secure any kind of loan for his needs.