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Published: Dec 29, 2023 8 min read

The traditional homebuying process is an onerous financial undertaking that not everyone can qualify for.

Private mortgages offer an alternative route to homeownership, and may be especially useful if you’re struggling to qualify for a mortgage through a traditional lender. Real estate investors, house flippers and landlords may also prefer to use established private mortgage lenders instead of getting a mortgage through a bank.

While buying a home with a private mortgage is usually much quicker and more flexible than going through the usual financial institutions, it carries unique risks you need to be mindful of.

This guide is your crash course to private mortgage lenders. You’ll learn what they are, how they work and what to look out for if you’re considering using a private lender to buy a home.

Table of Contents

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What is a private mortgage lender?

A private mortgage lender is a person or company that is willing to lend you money for the purchase of a home — basically it’s any entity that is not a typical financial institution such as a bank, traditional mortgage lender or credit union.

In many cases, private mortgage lenders are friends or family members who want to help you become a homeowner.

Usually, home sales are what’s called “arm’s length” transactions, which means a sale that is between two unaffiliated people or companies. Since private mortgages can be done between family members and friends, they’re often considered “non-arm’s length” sales.

These types of transactions are way less formal and may not have any application or screening process at all. It’s entirely up to the lender. This is why private mortgages may be attractive to homebuyers who are in a financial situation where getting approved for a regular mortgage is difficult.

On the other hand, some private mortgage providers are tightly run firms that lend to landlords, home flippers or real estate investors. In this case, the core difference between private mortgage lending companies and traditional banks or lenders is that the first is usually not a formally licensed mortgage loan originator with an NMLS number. That means they can’t provide conventional loans for owner-occupied homes (i.e. homes that the buyer lives in as a primary residence). Instead, the loans are usually for real estate investments.

How private mortgages work

The terms of the loan and application process will vary based on who your private mortgage lender is.

Interest rates through a private mortgage lender might not be pegged to current mortgage rates, and the repayment schedule can be much more flexible than the common 15-year or 30-year mortgage.

This could result in higher or lower interest rates. When dealing with friends or family, the interest rate may be similar to or lower than current mortgage rates. Established private money lenders, by contrast, tend to have short-term payment periods with higher interest rates than other types of mortgages.

Here’s a look at how the process stacks up against a traditional mortgage.

Private vs. traditional mortgage process

Regular mortgage

Private mortgage (family or friend)

Private mortgage (company)

Mortgage application

Lender pulls your credit history and credit score, reviews your income, assets, debt, employment history and more

Extremely flexible; may not have any application of credit requirements at all

May include borrower questionnaire and pull credit information; less rigorous income verification

Property valuation

Professional appraisal required

May use basic home value estimates, hire an appraiser, or neither

Professional appraisal required

Negotiation

Negotiation possible on interest rate, loan length and certain closing costs

Entire transaction negotiable

Interest rate, down payment, loan terms, loan amount and closing costs negotiable

Buyer due diligence

Inspection highly recommended; lender typically handles contracts, title and property-record matters

Must handle contracts, title and property records on own; real estate attorney strongly recommended

Must vet lender and contracts carefully; real estate attorney and inspection strongly recommended

Closing on the mortgage

1 to 2 months; down payment and negotiable closing costs due at settlement

No established timeline, down payment or closing costs

As little as 5 business days; down payment, closing costs, fees negotiable

Benefits of using a private mortgage lender

  • Flexible lending criteria: Unless you're a real estate investor or landlord, the biggest reason you’re considering private mortgages is likely because you’re having trouble getting approved by a regular mortgage lender. You’ll have a lot more flexibility with these types of loans.
  • Faster approval and funding: When getting a private mortgage through a friend or family member, your approval process is probably instantaneous and funding can start as soon as you hash out the details. Private mortgage companies may take a little longer, maybe one or two weeks, but are still far faster than your standard mortgage lender.
  • Customizable loan terms and repayment schedules: Private mortgages are far more flexible than ones through a bank, credit union or regular mortgage company. With a private mortgage, your interest rate*, loan length, down payment, closing costs and other contractual details are all negotiable.
  • Buying unconventional properties: If you’re interested in a commercial property, an investment property or residential property that you plan to spruce up or build on, private mortgage companies offer flexible financing, with many specializing in hard money loans.

*Note: The interest rate on your private mortgage still has to meet certain federal guidelines. The IRS publishes frequently updated “applicable federal rates,” which are the lowest allowable interest rates for private loans. If your rate is lower than that, there will be tax implications. While family and friends can cut you a deal, they might not want to give you a 0% mortgage “loan,” for instance, because the IRS would consider this a gift, and they would owe taxes on it.

Risks of using a private mortgage lender

  • Less oversight and fewer protections: Even established private mortgage companies aren’t regulated as strictly as, say, Bank of America, and your mortgage may not be shielded by federal consumer protection laws. You’ll have even fewer protections when financing a home through the Bank of Uncle Ted.
  • Higher interest rates and payments: Flexibility tends to come at a cost. Private mortgages offered by companies can come with interest rates several percentage points higher than current mortgage rates. Since the repayment length is typically also much shorter than a standard mortgage, your monthly payments could be much higher as well.
  • Potential predatory practices: Because there is less oversight on private mortgage lenders, you may be exposing yourself to scams or unfair borrowing conditions. Having a real estate attorney as well as an agent or mortgage broker review all of your documentation is highly recommended.
  • Less guidance: Regular mortgage lenders guide you through the homebuying process and tend to already have established relationships with insurance, inspection and appraisal companies. Private lending isn’t as clear cut, and you will likely have to do a lot of this research on your own.
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Private mortgage lender FAQs

Where do I find a private mortgage lender?

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If your private mortgage lender isn’t already an acquaintance, finding a legitimate one from scratch may prove difficult. Consider reaching out to trade groups like the American Association of Private Lenders, the National Private Lenders Association or local real estate experts for help finding trustworthy lenders in your area.

What happens to a private mortgage when the lender dies?

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If your private mortgage lender dies, what happens next is entirely up to the details in your loan and/or the deceased lender’s will. By default, your mortgage debt doesn’t simply disappear. It’s now due to the lender’s estate.

Are private mortgage lenders safe?

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A private mortgage lender could be just about anyone. So generally speaking, it’s impossible to say. Private mortgages and lenders are subject to fewer consumer-protection laws, and the loan’s terms and underwriting — if any — tend to be much less official than a regular mortgage. Because of this, proper due diligence as a buyer (even if you’re dealing with a family member) is a must. Always consult with a real estate lawyer, and consider reaching out to the American Association of Private Lenders or the National Private Lenders Association for help vetting real estate lending companies.

Can you refinance a private mortgage?

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Yes, you can refinance a private mortgage loan. If you’re refinancing through a traditional mortgage lender, keep in mind that you will need to undergo a more rigorous financial screening process as a borrower. It’s also possible to refinance a private mortgage through another private mortgage lender.

Summary of Money's guide on private mortgage lenders

  • Private mortgage lenders are alternatives to traditional financial institutions like banks, credit unions and regular mortgage lenders. They could be friends, family members or more established lending companies.
  • Private mortgages are often sought out by people who have trouble qualifying for a regular mortgage due to poor credit history or difficulty with verifying income (like gig workers or self-employed people). It’s also common for real estate investors, landlords and house flippers to borrow from private mortgage lending companies.
  • Private mortgages are much more flexible than regular mortgages, and just about every aspect of the home purchase — from the down payment to the interest rate to closing costs — is negotiable.
  • Sometimes, that flexibility comes at a cost: Private mortgage lending companies often charge higher-than-normal interest rates. On the flip side, a family member may choose to give you a great deal.
  • If you’re considering using a private mortgage lender, heavily weigh the pros and cons. And, please, consult a real estate attorney.
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