Private Mortgage: What It Is, How It Works

Dori Zinn is a personal finance journalist with more than a decade helping people understand money. Her work has appeared in Wirecutter, CNET, Credit Karma, Huffington Post, and more.

Betsy began her career in international finance and it has since grown into a comprehensive approach to journalism as she's been able to tap into that experience along with her time spent in academia and professional services.

What Is a Private Mortgage?

A private mortgage is a mortgage from a private lender, such as an individual or private investor. Private mortgages are different from traditional loans issued by banks, credit unions, and online mortgage lenders in several ways.

Private mortgages can help you reduce fees and other associated costs, but they have fewer regulations. Learn more about the upsides and downsides of using private mortgages for both the lender and borrower, in addition to how they compare to conventional mortgages.

Key Takeaways

• A private mortgage is a financial arrangement between a borrower and an individual lender.
• Private mortgages can include faster approval and flexible terms.
• Among the disadvantages, a private loan may have higher interest rates and limited consumer protections.
• Private mortgage lenders differ from traditional lenders in requirements and processes.

How Private Mortgages Work

A private mortgage is provided through an individual or private mortgage company rather than a traditional financial institution like a bank. Since there are fewer rules and guidelines, you might have to do more research to find the best private mortgage lender.

Once you find a lender, you can outline your agreement together. This includes any conditions you must meet before being approved for the loan. It will also include terms like the length of the loan, the interest rate, the type of loan, and estimated monthly payments. This information is also typically included in an agreement for a conventional mortgage.

Since this type of loan is riskier, you might benefit from speaking to a real estate attorney about the terms of your mortgage. Once both sides agree, you can sign and provide a down payment if necessary. You’ll then set up a payment plan and begin making payments after closing.

Benefits and Risks of Private Mortgages

Like other types of mortgages, private mortgages have pros and cons to consider as you determine how to finance your home.

• Flexibility
• Faster process
• Easier eligibility

• Shorter repayment terms
• Potentially higher interest rates
• Less security

Pros Explained

• Flexibility: You may be able to negotiate your mortgage terms, like the home price, repayment terms, interest rate, and fees.
• Faster process: You might have a shorter underwriting and approval process compared to a traditional mortgage application because there are fewer regulations.
• Easier eligibility: Borrowers who might not get approved for a traditional mortgage may be approved for a private one.

Cons Explained

• Shorter repayment terms: Rather than paying back a mortgage over the typical 30 years, you often get shorter loan terms with private lenders. You could be responsible for paying back your mortgage in a few months or over a decade, depending on your agreement. This would make monthly payments higher.
• Potentially higher interest rates: You could pay much more in interest on a private home loan compared to a traditional mortgage. Having bad credit means that while you may still get approved, it’ll be at a much higher cost.
• Less security: Because you’re not going through a traditional mortgage application or lender, you don’t have as many borrower protections. You might get approved for a private mortgage that you aren’t able to repay, which puts you at a higher risk of foreclosure.

Private Mortgage Lenders vs. Traditional Mortgage Lenders

Private mortgages tend to come from investment companies, not mortgage brokers. Rather than working with a bank, you’re dealing with private investors in your home loan approval process.

Traditional mortgages have set guidelines to protect the borrower and lender. Private mortgages don’t have the same protections in place, which makes the loan riskier to borrowers. Even with poor credit, you can still get a traditional loan, including a conventional loan, Federal Housing Administration (FHA) loan, U.S. Department of Agriculture (USDA) loan, or U.S. Department of Veterans Affairs (VA) loan, depending on your status and needs.

Credit is one aspect of eligibility to get a home loan, but it’s not the only factor. Lenders will also consider factors like your income and assets.

Is a Private Mortgage a Non-Bank Mortgage?

Private mortgages tend to come from investors—like equity firms or individuals—rather than banks. You might also be able to get a private mortgage from someone you know, like a friend or family member.

Is a Private Lender the Same as Hard Money?

A hard money loan is not the same as a private mortgage. They are both alternative mortgage options, but they each have different purposes. For instance, a house flipper might be more inclined to get a hard money loan when they need financing quickly to close a deal. A borrower with bad credit might choose a private lender because they haven’t been able to find a bank or other financial institution that will approve them for a traditional mortgage.

What Is the Average Private Mortgage Term?

Terms for a private mortgage can be as little as a few months to over a decade. Your terms can vary greatly depending on your lender and your agreement.

The Bottom Line

Private mortgages are one option for buying a home, but they might not be the best option for you. Before completing an application, compare all your homebuying options, including private mortgages, traditional home loans, and other financing opportunities. Consider consulting a financial professional for guidance on your specific situation.

1. Consumer Financial Protection Bureau. “Preparing to Shop for Your Mortgage.”
2. Consumer Financial Protection Bureau. “Home Mortgage Disclosure.”

A mandatory mortgage lock requires a seller of a mortgage in the secondary mortgage market to make the delivery to the buyer by a particular date or pay a fee.

A mortgage originator is an institution or individual that works with a borrower to complete a mortgage transaction. Originators are part of the primary mortgage market.

A dry loan is a mortgage where the funds are exchanged only after all of the required sale and loan documentation has been completed.

The defeasance process allows a borrower to substitute securities for their mortgage’s original collateral as a way to gain title to a property.

A deficiency balance is the amount of money owed to a creditor when collateral is sold for an amount that is less than what is owed on the secured loan.

A third-party mortgage originator is any third party that works with a mortgage lender to originate a loan. Originators can come from a variety of channels.

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