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Ultimately, a private mortgage doesn’t have the same restrictions as a traditional mortgage from a bank. With this in mind, it often offers more freedom and flexibility depending on whether the finances are coming from an individual or perhaps a business. Despite these differences, there is one key premise that makes the deal worthwhile; it must have a ‘win-win’ element for all parties. On one side, you have a borrower who is getting the money to buy a house or whatever it might be used for. On the other hand, you have an individual or business taking a risk with their money. As long as there is a return in place for them, it becomes worthwhile and the risk remains low for both.

Before we head into some precautions for private lending, we should first assess why this is necessary in the first place. The mortgage industry has been set up so that private lending can be avoided and everyone has a chance to borrow money from a conventional bank.  Well, there are a couple of examples where private mortgages may be necessary as you will see below.

Help Friends / Family

This works both ways and the obvious ‘help’ comes from the lender who is choosing to provide their own money for their friend or family member. However, the borrower is also helping the lender and this comes back to the ‘win-win’ situation we discussed a little earlier. How? Rather than paying expensive interest to the banks, the interest will now be paid to someone you know. With this, you know that the money is doing good on both sides which is great news.

Qualifying Problems

Aside from this, it could be the rules put in place by traditional lenders that mean private mortgages are the only option left. During the application process, there is a significant amount of paperwork and a substantial amount of information that needs to be provided before traditional lenders will consider you for a mortgage. If you are young, self-employed, do not have updated business income statements or have a low credit score it can be difficult to get the right paperwork in place. When this happens, the only options available to give up, or choose a private lender who can get your deal done fast.

Make the Agreement Official

Once this agreement is in place, it keeps everyone happy and it ensures that everyone knows the rules in place when it comes to repayments, interest rates, and more.

Interest rates have to be agreed upon along with applicable penalties for breaking the mortgage and any renewal terms.  Keep in mind you have to make sure you set aside funds for covering closing costs: legal fees, unpaid taxes and any other disbursements.

Before the agreement is confirmed, there should be a discussion as to what happens in various circumstances. For example, what happens when a payment is missed? Can the loan be restructured in any way? If necessary, this is the best time to contact your legal counsel because they will assess your agreement and give you tips on how to improve it or make changes. If the attorney gives your contract the go-ahead, you can be fairly confident that the agreement is good to go.