What is a private mortgage?
A private mortgage is exactly what it sounds like - a mortgage conducted between a borrower (of any type) and a private individual or institution. With these transactions, the lender is still protected in all mortgagee aspects such as security and power of sale privileges, but has the freedom to lend his or her money as desired and with very limited third-party restrictions.
What are the benefits to the borrower?
There are many reasons and benefits for a borrower to consider using a private lender/investor in a mortgage transaction:
Private lenders almost always have less stringent rules on income verification, credit history, existing exposure and debt levels. Their primary concerns are security and an exit strategy (how and when they'll recoup their principal) and are not overly concerned with the "standard" qualifying criteria used by major lending institutions.
Often borrowers require funds quickly for a variety of reasons (sickness, insolvency, divorce, major repairs, etc) and major lending institutions have thorough and slow turn-around times. Private lenders can close deals in a matter of days under normal circumstances.
Creating good relationships with private investors/lenders is one of the smartest things you can do for your own bottom line. Eventually, and without any doubt, you will need private financing at some point in your investment career. Nurture these relationships at all cost.
What are the benefits to the lender?
Private lending is quickly becoming one of the most popular investment vehicles for anyone looking to make a good return on their money. Here are the reasons why:
Private lending is a secure investment - that is, the monies advanced are "secured" against tangible assets (real estate). Unlike the stock or money markets, private mortgage lending protects the investor by securing the principal and interest against the real estate owned by the borrower. Under default, the private lender, as with any other lending institution, has the ability to enact Power of Sale proceeds to force the sale of the property in order to recoup the funds invested/lent. This is the primary reason investors look to invest in mortgages.
Return On Investment
There is no argument that private mortgages can yield significant returns for the lender. Investors can expect to earn rates of return in the ball park of 6-9% for 1st mortgages, 10-15% for second mortgages. In addition to interest on the mortgage premium, private lenders often also charge lender fees on their funds - specifically, a percentage of the total loan amount is paid back to the lender at closing in the form of a commission. These fees usually range between 1-6% of the total mortgage amount and can be a substantial way of earning quick profits for the investor.
In the private mortgage market, the investor can choose how and in which types of mortgages to invest. For example, some lenders only lend as blanket securities (one mortgage against multiple properties) while others focus on construction and short term loans. The point is, that private lenders have all the power: they often get to choose the rate, the fee, the term and the overall structure of the deal.