A private mortgage investor is an individual or group that issues loans for real estate purchases privately, rather than through a financial institution. Private loans tend to offer more flexibility than traditional ones, although they are also more expensive for borrowers. This type of lending may be the only option for a borrower with poor credit or other issues that make a conventional loan difficult to obtain.
The classic example of a private investor is a seller who agrees to make a private loan to a buyer. The seller originates a mortgage, receiving regular payments, including interest fees, from the buyer. Sellers can in turn sell their private mortgages to other investors if they need to close out the loan quickly. This option is often available with a "for sale by owner" home, although sometimes sellers working with agents may be willing to consider offering a private mortgage.
Other private mortgage investors have capital to invest in a community and may choose to offer private mortgages. Applicants for loans may find them in a number of ways, often through community organizations promoting home ownership or working to address high vacancy rates. The private mortgage investor can evaluate the circumstances and determine if he wants to offer a loan, and at what terms.
As with other types of mortgages, the private mortgage can involve a home inspection, flood certifications, and other requests to help the private mortgage investor determine risk. This information may help the investor decide whether to approve the loan, and it will also determine interest rates. Interest tends to be higher on private loans unless a borrower has a very good financial history, and such borrowers can usually get conventional loans and thus have no reason to turn to a private mortgage investor.
The secondary market for private mortgages includes a variety of private mortgage investors who may be willing to buy mortgages from each other. Typically the buyer receives a discount on the price and can collect the full value of the loan along with interest, making it a good investment if the borrower is a reasonable credit risk. One concern with private mortgages is varying standards on the part of investors who decide whether to grant loans. Buyers considering purchases of home loans from a private mortgage investor may want to consider investigating to make sure they will be getting their money's worth on the transaction.