Private Mortgage Loans Eagle ID

Investors in private mortgage lending used to consist of families and friends helping each other with house payments. But the profit potential in private mortgages for the lender—and the clear benefits to the borrower—helped this investment strategy gain notoriety in the investing community.

Private mortgage lending involves an individual investor—usually a home seller—taking on the risks and rewards typically held by mortgage lending institutions. This type of lending can offer good returns and low risk if structured properly, because it is secured against the actual property.

Private mortgages have several benefits to borrowers and investors. They allow borrowers who don’t qualify at traditional lending institutions to get mortgages elsewhere. Investors holding private mortgages can receive interest rates significantly higher than standard rates offered by banks.

“In most respects, the private lender should look at himself [or] herself as a mortgage company, and should demand everything that a good mortgage company would require when deciding whether someone qualifies for a mortgage,” Jay Kivitz, an attorney specializing in private mortgages, said in an e-mail interview. “They should also get an interest rate that makes the risk worthwhile. While it cannot be usurious, it should be at least [50 to 100 percent] higher than a bank rate.”

The mortgages are usually structured like hard money loans: short-term—from six months to three years—and typically based on the property’s equity value. In general, private mortgages hover between 50 and 70 percent loan-to-value (LTV), according to Don Konipol, general partner of the Managed Mortgage Investment Fund LP.

The lender should be sure the LTV is not less than 70/30 so there is an equity cushion if the mortgagor defaults, Kivitz said, and lenders should perform due diligence on the borrower.

“If these are small, residential mortgages, that would normally be given by one person to another, they have to get as much financial [and] employment information as possible from the mortgagor for at least two...years, as well as a credit report and a judgment search of the person, to see if they have current or past collection issues,” Kivitz said.

Private mortgages can be used for commercial properties A private mortgage can take on different structures, depending on what the parties are willing to agree to. While most private mortgages take on terms similar to hard money loans, it is possible for the lender and borrower to come up with a completely different structure.

Different property types are generally covered by different LTV ratios. For instance, private lenders will often look for a 50 percent LTV on raw or undeveloped land, 65 percent on commercial property and 70 percent on multifamily properties, according to Konipol. Theoretically, a lower LTV on a property correlates with lower risk.

Buyers who take on a private mortgage can also build equity, if they pay on time, assuming t...

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