How Do Private Mortgages Work?

Private Mortgages have an important place in the real estate world. A conventional mortgage is secured through a bank, credit union or mortgage lender. Private mortgages are secured through private means, such as family, friends, individual investors or businesses outside of conventional methods. Private mortgages offer individuals the opportunity to purchase property that banks otherwise wouldn’t approve them for. These mortgages are usually short term in nature in comparison to conventional mortgages. Often a private mortgage is the chosen route for real estate development and construction due to the short timeline many qualified developers face for their projects.

 

Who’s Looking at Private Mortgages?

Private mortgages aren’t for everyone. Often, private mortgages come on the scene when borrowers have inadequate credit, are self-employed, or are in the business of real estate development and are working on strict timelines. Real estate development projects often choose private mortgages due to the flexibility private lenders have in their qualification process. This flexibility allows for a faster approval for qualified developers and builders, allowing them to start their projects in a more timely manner.  

There are many reasons for turning to a private lender for a mortgage, but how do private mortgages work?

 

Where Does the Money Come From?

When it comes to Private Mortgages, in many cases, private investors raise the capital that’s used to lend out to the borrower. Unless you’re turning to a wealthy family member or friend, which carries its own specific risks. If you’re looking to a private mortgage investment company, then the funds that make up the loan you’re applying for will come from a variety of investors. Due to this, these companies have a bit more flexibility in how they approve loans.

This pooling of money from groups of investors is known as a mortgage pool. Mortgage pools are generally managed by a Mortgage Investment Corporation (MIC), and it’s corporations like this that’ll lend out money to borrowers for private mortgages. The interest that the borrower pays will, in turn, be the return on investment that the pool of investors receives.

 

How Do You Set Up a Private Mortgage?

With a traditional mortgage from a bank or conventional lender, you apply and go through the necessary credit and stress tests to make sure you can pay off the loan. With a private mortgage, this process is up to the lender and borrower to figure out. There are a few things that you should remember when it comes to setting up a private mortgage.

 

Written Agreement

Having a written agreement is crucial in any kind of financial or business deal. When it comes to private mortgages, a written agreement between the lender and borrower is vital. If you’re borrowing from a family member, friend, or individual, without a proper agreement, you can ruin relationships and destroy financial security. An agreement protects both the lender and the borrower. These agreements state the expectations for both parties, such as when payments are due, how they should be made, what happens if payments aren’t made, is the loan secured or not, if insurance is required, and what interest levels are associated with the loan amount. The best advice? If you’re choosing to enter into a private mortgage with an individual or business that doesn’t specifically deal in mortgage lending, make sure to get a lawyer involved to draw up the agreement. If you borrow from a reliable and experienced MIC, their knowledge will help to make sure everything is covered in an agreement.

 

Risks

There are risks associated with any kind of loan, private mortgages are no exception. If you’re borrowing from a family member or a friend, relationships can be altered or ruined if things don’t go well or you lack communication. Houses are big-ticket items, and any time a large sum of money is involved, tensions can run high when things aren’t going smoothly. When borrowing from a business, you can avoid these personal risks, but the usual risks associated with loans are still there. What if the borrower fails to pay or defaults? What if the borrower can’t financially handle the interest rate, or doesn’t maintain the property well? There are many risks associated with private mortgages, and it can be important to remember that these types of loans are traditionally for shorter term lending, such as in the case of real estate development and construction.

If you’re a qualified developer or builder looking for an expedited path to financing for a project, we can help. At Cooper Pacific, we have a firm understanding of mortgage investment and the real estate development realm. We pride ourselves on lending out to qualified developers that we believe in. Private mortgage loans with Cooper Pacific save you valuable time in the approval process so that you can get your project started on time. We’re here to help with your borrowing needs. Get in touch today by contacting our team member Jordan.