It is no secret that the housing lending market is not easy to maneuver at the moment. Even borrowers with credit scores of 720, that were once considered high, are now being turned down for all sorts of mortgages and loans. This is forcing more individuals to turn to alternative forms of borrowing. One of the most popular alternative forms of borrowing when it comes to financing a home is a private mortgage.

What is a Private Mortgage

A private mortgage is a loan between two individuals instead of a borrower and a traditional bank or mortgage lender. When it comes to a home mortgage, the seller of the home typically acts as the lender and the buyer of the home is the borrower of the mortgage.

How a Private Mortgage Works

A private mortgage works very similar to a traditional mortgage, but again, the lender is the seller of the home. A private mortgage is a legal agreement between the buyer and seller of the property and should be handled as such.

Step 1: The buyer typically gives the seller a down payment, as a good faith deposit. The amount put down as a deposit is written into the contract between the buyer and the seller. The deposit amount is also deducted from the amount of the mortgage.

Step 2: The interest rate on the mortgage should be negotiated between the lender and the borrower. Typically, a private mortgage has a higher interest rate than that of a traditional lender. This is because private mortgage borrowers usually cannot qualify for a regular mortgage or want the transaction to occur faster than a traditional mortgage. Whatever interest rate is negotiated should also be put into the written contract between the buyer and seller of the home.

Step 3: Write the term of the mortgage. Generally, private mortgages are short-term mortgages. While the term of the mortgage is negotiable as well, it will probably be for five years or less.

Step 4: Calculate the monthly mortgage payments and due date for the payments. Write all of this information into the agreement.

Step 5: Spell out the conditions of the mortgage. This should include what happens if the borrower makes late payments and that the home is collateral for the mortgage. If the buyer defaults on the mortgage, then the private mortgage lender has the right to foreclose on the home.

When a Private Mortgage Makes Sense

Primarily there are two reasons that someone would choose a private mortgage over a traditional mortgage. The primary reason being they cannot qualify for a traditional mortgage because if poor credit history and low credit score, they are self-employed and do not declare a high enough income or do not meet traditional lending requirements in some other way.

A borrower may also turn to a private mortgage because it is faster and easier than obtaining a mortgage through a traditional lender. Many property investors choose private mortgages over traditional mortgages because they are willing to pay a higher interest rate for the ease and quickness of obtaining the mortgage. Property investors often buy, fix and sell homes quickly so they only intend on having the mortgage on a short-term basis anyway.

As is the case with any type of mortgage, a private mortgage has its pros and cons for the borrower and the lender. It is imperative that the buyer and seller treat the mortgage as a legal agreement and put everything in writing, so there are no problems or confusion between the two parties. A private mortgage is a fast and easy way for a seller to sell a home and buyer to buy a home without the red tape that comes with traditional lenders.