What are Private Mortgages?

Almost all mortgages originate with a bank or financial institution. In some cases however, a private individual, a seller, or an investor may choose to hold a mortgage directly. This mortgage structure may bring several advantages to buyers, sellers, and third party investors. It is possible for anyone to offer a private mortgage, you don't have to be a bank, or even a real estate professional. In some cases, the seller of a home may choose to offer a private mortgage, sometimes called a "land contract," or if there are existing underlying mortgages, a "wraparound loan." This can be an excellent tool for a seller having a hard time selling a home. It can be used as a way to finance a buyer who would not qualify for a conventional bank loan, or it may be a way to sell a home that may be difficult to sell otherwise because it is in a marginal neighborhood or needs considerable work. The title is usually not transferred until after the entire loan has been paid; as such, the seller/financer retains full control over the property. There is very little risk in this practice; if the buyer defaults, the seller regains the house and keeps all the money the buyer has paid to date. Some third-party private investors also offer private mortgages simply as an investment vehicle, because it is often possible to charge a rate of interest significantly above prime - especially if the buyer is not able to qualify for a conventional mortgage due to poor credit. Regardless of whether the mortgager is the seller or a third party, the private mortgage is a negotiable instrument that can be bought and sold. The mortgage holder may choose at a later date to sell the mortgage to another investor at a discount, in order to receive a single lump-sum payment instead of monthly payments. In many cases, a private mortgage has a "balloon" clause, which requires the buyer to either pay off the private mortgage, or convert it to a conventional mortgage. From the buyer's point of view, the private mortgage can be an excellent option, and may provide a way to purchase a home when bank loans are impossible. In cases where the buyer has poor credit, this provides an opportunity to build up equity and a positive payment record; in many cases, after a few years the buyer will be able to refinance the private mortgage with a conventional loan, at a more favorable interest rate. Variations on private mortgages include lease-options and "rent-to-buy" agreements, where a certain portion of the monthly rent applies towards purchase.