A private mortgage is a loan secured by real estate where the lender is a person or a private company instead of a bank. A familiar example is the owner who sells a property and lets the buyer pay over time.
How it differs from a bank mortgage
The structure is the same. Someone borrows money, signs a promise to repay it and pledges a property as security, and if they stop paying, the lender can take the property through the legal process in that state. What differs is who is on the other side. With a private mortgage the lender is an individual, a family trust, a small company or a property seller, and the terms were agreed between the two parties instead of being set by a bank’s lending rules.
| Bank mortgage | Private mortgage | |
|---|---|---|
| Lender | A bank or mortgage company | An individual, trust or private company |
| Terms | Standard products | Whatever the two sides agreed |
| Paperwork | Standard forms | Varies widely in quality |
| Who collects payments | A loan servicer | The lender personally, or a servicer they hire |
| Where it can be sold | The institutional mortgage market | To private note buyers |
How a private mortgage comes about
Seller financing is one source. You sell a property and, in place of a bank loan, the buyer pays you in installments. No cash is lent, and what you are owed is part of the sale price.
A private loan is another: one person lends another cash to buy or refinance a property and takes a mortgage on it as security. A family loan is the same thing between relatives, recorded so that it is documented and secured. Whichever route produced yours, it sits among the types of promissory note that private buyers purchase.
The paperwork behind the name
“Private mortgage” is the everyday name for a pair of documents. The promissory note is the written promise to pay, and it states the amount, the rate, the payment and the dates. The security document, a mortgage or a deed of trust depending on the state, ties that promise to the property and is recorded in the county records.
The note is the asset: it is what you own and what a buyer purchases. The security document is what makes it worth buying, because it gives the holder a claim on the property.
A private mortgage can be sold
You do not have to wait for the payer to finish paying. Investors buy private notes, and you can sell your mortgage note whole or, on a note a buyer is willing to divide, only a block of its payments.
A buyer pays less than the balance. The gap between the two exists because the buyer is paying today for money that arrives over years and needs a return for the wait and the risk. For that reason selling is not always the right move: if the payments arrive on time for the rest of the term and you have no need of a lump sum, keeping the note brings in more money in total than a sale would.
What a buyer checks
- The payer’s record. How many payments have been made and whether they were on time.
- Equity. The property’s value minus what is owed against it.
- Lien position. Whether your mortgage is first in line to be paid if the property is sold, or behind another loan.
- The paperwork. Whether the note is properly signed, the security document was recorded, and the original note can be found.
- The terms. The rate, the payment and how long is left.
An unrecorded mortgage or a missing original note is better found by you than by a buyer in the middle of a sale. The same checks set the price, so have the answers to hand when you send us the note’s terms for pricing.
A word on the rules
Laws on private lending and seller financing exist at both federal and state level, and they differ with the property, the borrower and how often the lender makes such loans. Ask an attorney to review yours if you are unsure how it was set up.
Check your own documents first
Look in your files for the original signed note and for a recording stamp from the county on the mortgage or deed of trust. If both are there, you have what a buyer needs to start. If one is missing, ask the attorney or title company that handled the original sale, or the county recorder’s office, what can be done about it before you look for a price.
Related questions
Is a private mortgage the same as seller financing?
Seller financing is one way a private mortgage is created, but not the only one. A cash loan from an individual or a family member, secured by a recorded mortgage, is also a private mortgage.
Does a private mortgage need to be recorded?
Recording the security document in the county records is what establishes its place in line against other claims. An unrecorded one is much harder to sell. Ask an attorney or title company how to record yours if it was never done.
Can I sell a private mortgage I made to a relative?
Yes, if it is properly documented and the relative has been paying. A buyer prices it like any other note. Bear in mind your relative will then be dealing with the buyer, not with you.