What are Private Mortgage Loans?

Private mortgage loans are loans issued by individuals or groups to those who either own a property or wish to buy one. In contrast to typical mortgage loans offered by banks or lending companies, such a loan can be attained by even a borrower with poor credit. The disadvantages of private mortgage loans are that they offer only a portion of the appraised value of the property and generally carry high interest rates. They can be useful as a short-term option for borrowers who are in financial distress or who wish to make a property purchase for a quick turnaround.

Mortgage loans are the standard way that most people buy real estate. Individuals connect with a banks or other institutional lenders, which in turn loan a great deal of the price of the house in return for regular interest and principal payments. Traditional mortgage loans generally are paid out over a long period of time and require the borrower to prove his or her financial standing to the lender. Private mortgage loans are alternatives to these traditional loans that carry specific advantages to certain borrowers.

Among these advantages is the fact that the lender of private mortgage loans generally has little concern for the credit ratings of the borrowers. These loans are based on the profitability of real estate properties. If the property in question has value, either because of income-generating potential or as a way of attracting other lenders, then a private lender will generally offer the loan. Such loans often have short durations of a few years or even just six months, as opposed to traditional mortgage loans which can run up to 30 years.

Of course, borrowers have to pay a price for the convenience and ease with which they can obtain private mortgage loans. The interest rates demanded by private lenders are substantially higher that those attached to traditional mortgages. In addition, these private loans generally cover just a portion of the equity of the property. On an income-generating property like a hotel, a lender may loan as a high as 70 percent of the appraised value, while properties that don't generate income usually command up to 55 percent of the value from lenders.

Despite the high costs, private mortgage loans can be particularly useful to those in desperate need of refinancing. For example, someone who has fallen behind on his traditional mortgage can use a private mortgage loan as a stopgap to avoid foreclosure. If the property generates enough income to pay off the private loan, the property owner might be able to use the loan to get out of a serious financial predicament. An investor looking to get involved with an income-generating property for a short term might also be a good candidate for a private loan.