What are Private Mortgage Investors?

Private mortgage investors are individuals or groups other than banks or other lending institutions which issue mortgages for the purchase of a home. Most of the time, the private mortgage investor is the seller of the house. For example, you could finance the home from the seller directly rather than working with a bank. You would then give your down payment and your monthly mortgage payments to the seller. If you default on your private mortgage, the seller gets his or her home back. There are a number of pros, cons and considerations to keep in mind with private mortgage investors.

Benefits of Getting a Private Mortgage

Why would you want to get a loan from a private mortgage investor rather than a bank? For one, it’s much easier to qualify for a private mortgage than a bank or credit union, since it’s wholly up to the private mortgage investor. This reason alone is what often motivates buyers to take out a private loan, especially buyers who might be classified as subprime borrowers at a bank. Also, because you won’t be working with a bank, the closing costs may be lesser or more negotiable. The private mortgage investor will likely want to run a credit check on you and hire an attorney to draft the mortgage, but how these fees are paid can be negotiated as part of the purchase.

Drawbacks of a Private Mortgage

Private mortgages typically come with higher interest rates than traditional fixed rate mortgages from a bank, though they may be lower than a subprime mortgage (if you can even get one these days). Again, the interest rate you pay will be completely negotiated between you and the private mortgage investor, so things can go either way. Also remember that a private mortgage investor has the right to sell your mortgage on the open market, just like a bank might. So don’t count on your mortgage checks always going to the person you’ve spoken to face-to-face. They won’t be able to change the terms of the mortgage, but a third-party private mortgage investor whom you don’t know personally may be less willing to cut you a break if you hit hard times or wish to renegotiate the mortgage. Also, remember that if it’s not in writing, it’s not binding. Beware of private mortgage investors who may promise you leniency or some other terms that are beneficial for you but fail to put it in writing. If your mortgage is sold or if the private mortgage investor changes their mind, you’re out of luck regarding those verbal promises.

Finding a Private Mortgage Investor

Most sellers who will consider issuing a private mortgage are those who have homes listed For Sale By Owner (FSBO). Oftentimes, “private financing” or “private mortgage” will be included in the listing. You may also be able to find a third-party mortgage investor, but because they may be less familiar with the property and your financial situation, you may end up jumping through all the same hoops as you would with a bank or mortgage broker.

Conclusion

Private mortgage investors allow those who would not qualify for a traditional mortgage to finance a home. High risk borrowers and those with unusual credit profiles can work directly with sellers or a third-party mortgage investor to qualify for a home mortgage, albeit at higher interest rates. Meanwhile, sellers can make money on the interest or motivate buyers to close on the asking price by offering private mortgages.