Brokering Private Mortgages: What the Job Really Involves

Brokering private mortgages means connecting the person who holds a privately made mortgage loan with an investor who wants to buy it. You do not lend money and you do not have to own the note. Your job is to gather the facts, package the note so a buyer can price it, and get more than one buyer looking at it.

This post is for people learning the broker’s side of the business. If you hold a private mortgage and want to sell it, start with our guide to what a private mortgage is instead.

What counts as a private mortgage

A private mortgage is a loan secured by real estate where the lender is a person or a small company, not a bank. The most common kind on the secondary market is the owner-financed note: someone sells a house or land, the buyer pays part of the price up front, and the seller “carries” the rest as a loan. The buyer of the property becomes the payer and the seller becomes the note holder.

Others come from private lenders who made a loan to a friend, a family member or a small investor. The paperwork is the same in shape: a promissory note (the promise to pay) and a mortgage or deed of trust (the document that ties the loan to the property).

Two kinds of “brokering” that get confused

The phrase “private mortgage broker” can mean two very different jobs, and the rules for them are different.

• Arranging a new loan. You help a borrower find a private lender to fund a new mortgage. That is loan origination work. In most states it falls under mortgage broker or loan originator licensing, and federal rules such as the SAFE Act and parts of Dodd-Frank can apply when the loan is on a home someone lives in.
• Selling an existing loan. The loan already exists. The payer has been making payments, maybe for years. You help the current holder sell all or part of that loan to an investor. This is what most people mean by note brokering, and it is what this post covers.

Licensing for the second job varies by state, and some activities that look simple, like being paid a fee tied to a real estate loan, can trigger rules. Read our overview of licensing and note brokering and check with a local attorney before you take a fee.

What a buyer needs from you

An investor buying a private mortgage is buying a stream of future payments. They price it on how likely those payments are to keep coming and what they could recover if they stop. That means the facts that matter most are about the payer, the property and the paperwork.

• The note terms: original amount, interest rate, monthly payment, remaining balance, number of payments left, and any balloon (a large lump sum due before the loan would otherwise be paid off).
• Payment history: how many payments have been made and whether any were late. Buyers call this seasoning. A note with two years of on-time payments is worth more than a brand-new one.
• The property: type, condition, rough value, and whether the payer lives there.
• The paperwork: copies of the note, the recorded mortgage or deed of trust, the closing statement and proof that taxes and insurance are current.
• The down payment: how much the payer put in at the start. Skin in the game matters.

Our guide on how to package a note for buyers walks through the full file.

A worked example

Here is a typical example, with round numbers chosen to keep the math readable. Say a seller holds a private mortgage with these terms:

• Remaining balance: $80,000
• Interest rate: 8%
• Monthly payment: about $765
• Payments left: 180 (15 years)
• Payment history: 3 years, no late payments

A buyer prices the note by choosing a yield, the annual return they want for the risk, and working out what the remaining payments are worth today at that rate. The gap between the balance and the price is the discount. Here is what that same stream of payments is worth at different yields:

One point of yield moves the price by close to $4,000 on this note. That is why the broker’s work matters. A clean, well-documented file gets priced at the lower yield. A file with gaps gets priced at the higher one, or the buyer cuts the price late in the process when they find the gaps themselves.

If you bring this note to three buyers and they come back at 10%, 11% and 12%, the seller can see the spread and choose. Your fee comes out of that picture, so tell the seller plainly how you are paid and confirm that the price you quote is the net amount they receive. Our page on how note brokers are paid covers the common ways that works.

Where private mortgages get harder

Private loans are made by individuals, so the paperwork is uneven. These problems come up often:

• No servicer. The payer pays the holder directly by check or transfer, and nobody kept a clean ledger. You will need bank statements to prove the payment history.
• Unrecorded documents. If the mortgage or deed of trust was never recorded with the county, the buyer’s security is weak until it is fixed.
• Missing originals. Buyers want the original signed note. A lost note can often be handled, but it slows the deal and may lower the price.
• Owner-occupied homes made without the right steps. Some buyers check whether the original loan followed federal and state rules for residential lending. A note that did not may get a lower bid or no bid.
• Thin equity. If the payer put little down and the property has not gained value, buyers see less cushion and price for it.

Find these early. Telling a seller about a problem on day two is far better than having a buyer find it on day twenty.

Partials: the option many holders never hear about

Not every holder needs to sell the whole loan. A partial is a sale of a set number of future payments, such as the next 60, after which the payments go back to the original holder. The buyer pays less cash than for the full note, but the seller keeps the back end of the loan.

For a holder who needs a specific amount of cash, or who does not like the discount on a full sale, a partial is often the better fit. Bringing it up shows the seller you are working for their outcome, not just the fastest close. Our section on partial purchases explains how they are priced.

What separates a useful broker from a middleman

Holders of private mortgages are often older, often sold a single property, and rarely know how notes are priced. The fear they bring to the first call is simple: they will be lowballed and not know it. A broker earns trust by doing three things:

1. Showing the math, including the yield and the discount, and saying plainly how they are paid.
2. Getting more than one bid, so the seller is not choosing between one offer and nothing.
3. Saying so when keeping the note is the better call.

For a fuller picture of the role, see what a note broker does.

Bottom line

Brokering private mortgages is about getting a loan that was made between two private parties into a form an investor can price with confidence. Keep clear of new-loan origination unless you are licensed for it, collect the note terms, payment history, property facts and paperwork up front, and put more than one bid in front of the seller. The cleaner the file, the lower the yield buyers need, and the more the seller keeps.