Self-Directed IRA Expert: Horizon Trust BlogDecember 8, 2021by horizontrustWhat Are Private Mortgages and Should I Invest In Them?

Many assume that the intermediary participation of the bank in mortgage transactions is a prerequisite, but it is easy to prove this assumption wrong.

Did you know that a real estate mortgage agreement can be possible without resorting to a financial institution? 

And how can the legal process of signing real estate sale documents and completing the deal be accomplished with only two parties?

Let’s learn more. 

What Is a Private Mortgage?

A private mortgage, or privately-held mortgage, is a loan granted by a private money lender to an individual to purchase real estate. 

In the case of a bank mortgage, an official representative plays the role of an intermediary between the bank and the borrower, an agreement between individuals eliminates this link. It allows the deal to be conducted with no bank intervention. 

A privately-held mortgage is offered by an individual or non-bank institution to potential homebuyers who cannot obtain a traditional loan from a financial institution. 

The inability to get a bank mortgage is often due to a low credit rating and poor credit history. Therefore, a potential mortgage holder may consider a mortgage loan a viable option.

Although this type of mortgage will probably not become the main form of lending to individuals, it is definitely worth a look due to a number of significant advantages when choosing a proper mortgage loan program or looking for a profitable real estate investment niche.

What Are the Key Points to Be Covered in a Private Mortgage Agreement?

For the deal to be listed as a private mortgage, it is mandatory to specify all the terms and conditions under which the lender grants the borrower an installment plan:

  • the amount of the down payment and late payment fee 
  • the total value of the property and the amount of mortgage payment
  • the date, number, and sequence of payments
  • the due date for full repayment of the mortgage loan
  • procedure for termination of the contract in case of long-term non-payment

What Are the Risks of a Private Mortgage? 

Deals with installment payments are subject to the same risks as other sales contracts conducted on the secondary real estate market. There can be legal pitfalls and technical nuances, but in the case of a privately held mortgage, the legal agreement between two parties and the private mortgage insurance (PMI) can protect them both against force majeure. 

Still, the risks to the lender are not unjustified. For example, real estate investors may face a mortgage holder who stops repaying the mortgage debt after a certain period.

However, this disadvantage does not mean the loss of either the property or the money. Since the private mortgage deed contains a mortgage note that the property is encumbered, it is impossible to carry out any actions with the property until the encumbrance is removed with the lender’s consent.

This prevents the property from being leased or resold.

Although resorting to foreclosure or litigation may be time-consuming and expensive, in case of late payment or non-payment, the lender can sue for termination of the contract.

What Are the Terms of Termination Any Type of Mortgages?

When it comes to investing in mortgages in a traditional way, that is, via banking institutions, there are three scenarios in case of non-payment:

  • the borrower is obliged to repay the entire amount of debt ahead of schedule
  • the court will order to sell the apartment to pay off the debt
  • the court will decide to restore the status quo, that is, to return the property to the lender and the money to the borrower

Compared to terminating a mortgage agreement procedure for non-payment with the bank, a privately held mortgage has only one way of coming to a mutual agreement. The right to take full possession of the real estate must be returned to the lender, while the entire amount of money paid, without interest, to the borrower. 

What Are the Benefits of Investing in Private Mortgages?

1. Independence

The major advantage of investing in private money loans is that absolutely any individual can become a private mortgage lender. To step in as a private investor, there is no need to contract with real estate lending companies or start your own commercial company. 

Of course, this role requires a lot of knowledge and experience and a keen eye for finding the best deal. Also, if you are embarking on your journey in order to invest in private mortgages, you will need the help of a professional attorney to prepare competent and legally correct contracts.

Moreover, there is an alternative for finding deals for private investors – professional real estate companies can evaluate the risks and investments in terms of returns and payback period and provide you with profitable and reliable private mortgage investment options.

2. Guaranteed Regular Income

Private mortgage investing means that the investor will earn a steady, fixed monthly income (unless the contract specifies a different sequence of payments). Such private loans are not signed for a long term. Usually, a private loan is issued for just a couple of years until the borrower improves their financial status.

Over this period, provided all the contract conditions are met, the lender receives a higher interest rate for a shorter period than, for example, the bank would get by providing a private mortgage loan.

The official statistics claim that as of mid-November 2021, the average interest rate on a bank mortgage stands at 3.10%, while private loaners may get 2-3 times higher percentages.

3. Flexibility

Banking institutions follow and are subject to strict government regulations that restrict loans to individuals based on the borrower’s credit status. Private lenders partially follow state laws, but they are much less regulated, so they can adjust to each mortgage contract to comply with the lender’s needs. 

While banking institutions offer fixed loan programs for issuing mortgage funds approved only by bank management, private lenders can provide an agreement where some items can be changed at the lender’s request or the borrower’s request. In general, the approval process for such a mortgage is much more straightforward and faster for both parties.

To Sum it All Up

Private mortgage loans are a reliable and short-term financial investment with a high payback rating and legal guarantees of income. In addition, the simplicity of transactions in the real estate market allows both professional and novice investors to try their skills and experience and raise their financial capital.

Find out how you can get started on your investment journey and learn more about real estate investment tools available at Horizon Trust. Connect with us today. 

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