What are Private Mortgages?

Introduction

A private mortgage is simply a mortgage arranged directly with a private individual, a seller or investor, against the common practice of mortgages being sanctioned by banks and financial institutions. Private mortgage arrangements may hold several advantages for everyone involved in the deal.

Who can Offer a Private Mortgage?

Anyone can offer a private mortgage, not just banks or real estate professionals. A seller of property might grant a private mortgage in some situations. This method is called a land contract. This is a good way for a seller to dispose his or her property at the earliest. A buyer who does not qualify for a bank loan might find this an attractive scheme.

Offering private mortgages can be a good investment method for third party investors as well. They typically target buyers who do not qualify for conventional loans and generally charge interest rates significantly above prime rates.

The Clauses

The titles to the property are generally not transferred until the loan is paid in full, so the seller or financier has full control over the property till such time. This is quite risk free, as the seller gets to regain the property and keep the money the borrower has paid so far, in the event of borrower defaults.

In either case, whether the mortgager is seller or third party investor, the arrangement is usually negotiable. The mortgage holder is entitled to sell the mortgage to another party for a lump-sum amount.

Who Wants a Private Mortgage?

Private mortgages are an attractive option to people who cannot avail conventional bank loans. A borrower with poor credit history can use a private mortgage to raise equity and develop a better payment record. The borrower in such a situation usually expects to convert the private mortgage into a conventional loan with a lower interest rate.

Some private mortgages are rent-to-buy arrangements. Here a percentage of the monthly rent is meant as an installment towards purchase of the property.