If you have a mortgage through a private lender you may be wondering if it is possible to refinance from a private mortgage into a traditional mortgage.
The answer: Yes, you can! Refinancing a private mortgage into a traditional mortgage is actually very similar to a standard traditional mortgage refinance.
In order to refinance your private mortgage into a traditional mortgage, you will need basic documentation – the same documentation you needed when originally applying for a mortgage. Additionally, you will need a Verification of Mortgage (VOM) from the mortgage holder, stating the details of the mortgage and your payment history. The deed and the tax bill for the property you are refinancing are also important documentation that will help the transaction move along smoothly, so be sure to have these on hand as well.
When refinancing a private mortgage, your credit scores will have to qualify, similarly to how they are required to qualify for approval for a traditional mortgage. Additionally, an appraisal of the property will have to be done to ensure the value supports the loan.
Keep in mind that most people in private mortgages do qualify for traditional financing and may not know it. Also, keep in mind that having a mortgage on your credit report will greatly influence your credit score, and will positively influence your credit score if it is being paid on time.
What is the advantage of refinancing from a Private Mortgage (usually held by the owner) into a traditional FHA or Conventional Mortgage through a Lender? Normally you will get a lower
interest rate which will lead to a lower monthly mortgage payment through a traditional mortgage. Having a lower payment will free up capital that allows you to either pay down the principal payment faster or use the extra savings towards other high-interest debt.
You may also be able to secure a longer term to help you with your payments when you refinance. If you are in a Private Mortgage that has a “Balloon” payment or has terms of paying off the mortgage in 15 years, you will have more options by refinancing into a Conventional or FHA Mortgage. If you choose a 30-year fixed mortgage to refinance into, your payment is spread across 360 months which along with the lower interest rate will lower your monthly obligations. Along with lower monthly payments, 30-year fixed mortgages do not have balloon payments so you will not be forced to come up with a large amount of funds to pay off the mortgage holder.
While Private Mortgages can be an option, they also have downside risks associated with them. Due to the higher rates that often come with private mortgages, your payment may be much higher than you would have gotten with a traditional mortgage. In addition to that, if you fail to make payments on your private mortgage, you risk foreclosing on your home. In some cases, private lenders may be able to make the foreclosure process faster than a traditional lender and the private lender may not work with you to modify your mortgage.
It is very important to review your paperwork thoroughly when you are preparing to obtain a private mortgage. Some payback plans are much shorter than a standard 30-year fixed mortgage, thus, along with higher interest rates, may make your monthly payment unsustainable for the entire duration of the personal loan.
If you have a private mortgage (owner financing, rent-to-own) and would like to find out if you qualify for a traditional mortgage, please contact us online or give us a call at 518-782-1202. We’d be happy to help you learn more about your refinancing options and can help you find out if you qualify for a traditional mortgage.
Note: This post has been updated as of December 11, 2024.