When most people need to take out a loan, the bank is the first thing that comes to mind. However, banks are not the only financial institutions that can give loans. You can get loans or mortgages from other financial institutions, such as credit unions and private lenders.
Credit unions are similar to banks. They offer similar financial products but may not have a wide range of product offerings as the banks do. Credit unions operate as membership and non-profit organizations; they focus on product offerings that benefit members with typically lower fees. Members buy shares in credit unions and receive profits as dividends.
If you get a mortgage with a credit union, you may get a more favourable interest rate than traditional banks. Credit unions that are not federally regulated are not required to do a mortgage stress test when you apply for a mortgage. If you do not qualify for a mortgage through a regular bank due to the stress test, you may get approved by a credit union.
Private lenders are also like banks; they give loans and mortgages. However, they are usually smaller institutions. Like some credit unions, private lenders do not need to follow many federal lending regulations.
Borrowers who do not meet stringent requirements from banks to get mortgage approvals may get approved by private lenders. Private lenders, often offer more customized lending options and work with borrowers to provide alternative lending solutions.
To provide accessible loans and mortgages, private lenders usually take on higher risks. Sometimes, they lend to people with unconventional income sources or low credit scores. Generally, private lenders do not carry out mortgage stress tests; they may assess loan approvals differently from banks and credit unions.
Mortgages through private lenders may come at higher rates due to the higher risk profiles they provide loans to. While banks and credit unions get funds from customers’ and members’ deposits, private lenders get funding primarily from investors.
Investors in the private lending industry need to earn returns, and thus private lenders generate profit from higher lending fees and interest rates for high-risk lending.
Real estate investors and developers get mortgages from private lenders for alternative investment ventures that require a quicker funding process, which most banks or credit unions do not have. Faster accessibility to mortgages is one reason people choose private lending companies.
Choosing to get a loan or mortgage from a bank, credit union, or private lender depends on your unique situation. Real estate investors with complex business models may prefer private lenders (like Dorr Capital) as they offer customized loans without bureaucracy and lengthy requirements from the federal government.
Retail home buyers without sufficient credit histories, regular incomes, or good credit scores may opt for mortgages through private lenders if they do not get mortgage approvals from traditional banks or credit unions.
On the other hand, banks and credit unions offer complex products like home equity lines of credit to help homeowners tap into their home equities. Not all private lenders provide such products for borrowers.
Banks, credit unions, and private lenders are essential in the lending industry. It is important to do extensive research and choose which financing option works best for you.