Private mortgage – what is it and how can you benefit? A private mortgage is, quite simply, a mortgage that is set up outside a lending institution. It may not require a credit check, or reams of paperwork. It will, however, require some legal documentation and perhaps the assistance of an attorney to properly set up a private mortgage.
Let’s say, for example, that you are a very young couple with no credit history whatsoever. You’ve both obtained good jobs and believe your income will grow over time. The banks, mortgage companies, and Internet lenders prefer to loan to people with a good credit record. But what if neither of you have used credit in the past?
Using this same couple, let’s say that Grandmother, an aunt, uncle, friend, or another family member is in a very good financial position and likes to make good solid investments. This person believes in the young couple trying so hard to obtain a mortgage for a first home, but hates to see them going through all the hassles of applying and being turned down for loans, even thought they have no bad credit. This person may step in and offer to provide a private home financing for the couple. This is exactly what a private mortgage is! A private party offers to hold a mortgage for another private party. No banks have to be involved, but legal paperwork should be drawn up to prevent the possibly of the private mortgage somehow causing future bad feelings.
With a private mortgage, any terms and payment plans can be established. A down payment may or may not be requested by the lender. The mortgage holder -- if they are really just doing this to help their friends or family -- can charge lower interest rates than could be obtained elsewhere. However, keep in mind that a loan, especially a private one, is still a business deal. Don’t take advantage of your friend or family because of their private help.
Usually, the person offering the private funding for a private mortgage will look at the current rate paid on a long-term certificate of deposit in the same amount as they are considering the private mortgage for the home purchase. This rate is always lower than current mortgage interest rates, and they will probably ask for interest rates to be somewhere in between that of the current CD rates and the current interest rates. They might even ask for interest at the rate of current mortgage lenders since, after all, they are putting out a lot of private money. Don’t look a gift horse in the mouth! Be happy that someone loves you so much they are willing to offer you a private mortgage.
All parties involved should go to an attorney and draw up papers that make the private mortgage legal and binding. This protects the private investor’s monies and defines clearly any terms for early payoff, late payoff, foreclosure if payments are not made, insurance requirements, and other facts, just like with a non private mortgage coming from a lending institution. The cost will be low compared to a traditional closing. This private lending of the funds will not, however, replace the home sale closing process.
With a private mortgage in hand, the couple can then go purchase the home they have found, paying in effect, cash for the home. The closing company will most likely require a copy of the private mortgage paperwork to prove where the private money came from.
If you enter into a private mortgage, take it just as seriously as you would any other mortgage. Even though someone has been kind to you, that doesn’t mean they don’t want and expect or even need the payments on time every single month!
Special Mortgage Types
The 40 Year Mortgage
Buy to Let
Adjustable Rate (ARM)
No Cost Mortgages
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