Private Lenders Are Offering Home Loans to Borrowers Rejected By Banks

Since the financial crisis, many traditional mortgage lenders have retreated from financing borrowers who appear risky, due to poor credit scores, a troubling debt-to-credit ratio or less than a 20 percent down payment. Seeing a hole in the market, some private financiers are stepping up to provide home loans to borrowers who have been rejected by banks.

Most of these private lenders have already made fortunes in the real estate business, and stand to earn as much as 8 percent on each private home loan, since private lenders tend to charge interest rates as much as triple those for traditional mortgages. Though this may seem like a boon for the private lenders, borrowers are also protected under the law. Each private lender must, at a minimum, register with their home state to ensure they play by the rules of the Consumer Financial Protection Bureau.

Many in the business say they can’t make these private loans fast enough, as demand has spiked with banks and other traditional lenders issuing more stringent mortgage application guidelines. Though interest rates are high, rapid growth in this area proves that there is consumer demand for an alternative road to homeownership. The unprecedented growth in the industry is likely to continue as long as traditional lending continues to shrink.

Image via Flickr/siowjianming