A private mortgage loan is a home loan provided by an individual or a private company rather than a bank or credit union.
These lenders typically offer short-term financing, often secured by real estate, and cater to borrowers who may not meet conventional lending requirements.
People commonly seek private mortgage loans when facing tight timelines, credit challenges, or unique property types that traditional lenders may not support.
How Private Mortgage Works
Traditional mortgages typically require extensive income verification, credit checks, and a long approval process.
Private mortgage loans, on the other hand, are streamlined and asset-based.
Private lenders focus primarily on the value of the property being used as collateral and the borrower’s plan for repaying the loan—also known as the exit strategy.
Here’s a step-by-step look at how the private mortgage process usually works:
1. Application
The borrower submits a loan request directly to a private lender or broker.
This step requires basic details about the property, including the following:
Desired loan amount
Purpose of the loan (e.g., purchase, refinance, bridge financing)
General outline of the borrower’s financial situationExit strategy
2. Property Evaluation
The lender conducts a property assessment to determine the current market value. This often includes a formal appraisal or a broker’s price opinion.
Since the private mortgage loan is primarily secured by the real estate, this evaluation plays a major role in loan approval. Lenders may also consider the property type, location, and condition.
3. Due Diligence & Loan Structuring
Private lenders typically perform limited due diligence compared to banks. Instead of digging deep into tax returns or employment history, they assess:
The borrower's equity or down payment
Loan-to-value ratio (LTV), usually capped at 60% to 75%
The exit strategy (e.g., refinance, property sale, or rental income)
The timeline and risk level of the investment
Loan terms are then proposed based on these factors, including interest rate, loan duration, repayment structure, and any fees or collateral conditions.
4. Term Negotiation
Since private mortgage loans are more flexible, borrowers can often negotiate terms directly with the lender.
These loans typically come with:
Higher interest rates (often 7%–12% or more)
Shorter repayment periods, commonly between 6 months to 3 years
Interest-only payments, with a balloon payment due at the end of the term
Fees such as origination points or underwriting charges are also discussed at this stage.
5. Funding
Once the borrower accepts the loan terms, legal documents are prepared, and the deal moves quickly to closing.
In many cases, funding can occur in as little as 7 days, especially when time is of the essence—such as in real estate auctions or urgent purchase scenarios.
Pros and Cons of a Private Mortgage
Private mortgage loans offer a unique set of benefits, and some important trade-offs. Understanding both sides can help borrowers make a more informed decision based on their specific situation.
Pros of a Private Mortgage Loan
1. Fast Approval & Funding
One of the biggest advantages is the speed of the lending/funding process. Because private lenders don’t rely on lengthy underwriting procedures, borrowers can often receive approval and funding within days.
This is especially beneficial for time-sensitive transactions, such as competitive real estate deals, foreclosure prevention, or quick-close purchases.
2. Flexible Terms
While traditional lenders that follow strict guidelines, private lenders have the freedom to tailor loan terms to fit the borrower’s needs.
They can adjust the repayment schedule, interest-only options, and even collateral structure.
This makes private mortgage loans a strong choice for unconventional or creative financing situations.
3. More Lenient Qualification Requirements
Private mortgages are asset-based, which means approval relies more on the property’s value than the borrower’s income, employment, or credit history.
This makes them accessible for:
Borrowers with poor or limited credit
Self-employed individuals with non-traditional income
Foreign nationals or investors without U.S. credit profiles
4. Ideal for Bridge Lending Scenarios
These loans are commonly used by real estate investors, flippers, or homeowners in transition.
Whether it’s funding a rehab project or bridging the gap between buying and selling, private mortgages offer flexibility where banks may not.
Cons of a Private Mortgage Loan
1. Short-Term Financing
Most private mortgage loans are designed to be short-term, with repayment terms ranging from 6 months to 3 years.
This means borrowers must have a clear exit strategy to avoid default when the loan matures.
2. Upfront Fees & Closing Costs
Borrowers should be prepared for origination fees, broker fees, legal costs, and sometimes appraisal or servicing charges.
It’s not uncommon for origination points to range from 1% to 3% of the loan amount. These costs can add up quickly and should be factored into the overall cost of borrowing.
A private mortgage loan can be a powerful tool when speed, flexibility, and accessibility are priorities. However, it comes at a higher cost and shorter term.
Private mortgage loans are best suited for borrowers who need short-term financing and have a well-planned strategy for repayment or refinancing.
What is a Private Mortgage Lender?
A private mortgage lender is an individual investor, group, or company that offers loans secured by real estate. These lenders operate outside of traditional financial institutions and are often real estate-savvy investors themselves.
Because private lenders set their own rules, they can provide creative financing solutions.
How Much Does a Private Mortgage Loan Cost?
The cost of a private mortgage loan can vary widely depending on the lender, the borrower’s risk profile, the property type, and the complexity of the deal.
While these loans are typically more expensive than traditional mortgages, they offer faster access to capital and greater flexibility. Many borrowers consider this well worth the premium.
Here’s a breakdown of the typical costs involved:
1. Interest Rates – 7% to 12%
Private mortgage loans generally come with higher interest rates, usually ranging from 7% to 12%, and in some cases even higher for riskier or unconventional deals.
Rates are determined by factors such as:
LTV ratio
Property type and location
Borrower’s creditworthiness (though less heavily weighed)
Loan duration and exit strategy
Because private lenders take on more risk and offer quicker funding, they charge a premium to offset that risk.
2. Origination Fees – 1% to 3%
These are upfront fees charged by the lender to process and fund the loan. Origination fees typically range from 1% to 3% of the total loan amount but can be higher depending on the deal’s complexity or urgency.
For example, a $500,000 loan with a 2% origination fee would cost $10,000 upfront.
3. Other Common Charges
In addition to interest and origination points, borrowers may encounter several other fees:
Appraisal or Valuation Fees. To determine the property’s market value
Legal Fees. For drafting and reviewing loan documents
Underwriting or Processing Fees. For administrative tasks
Servicing Fees. If the lender outsources loan management
Extension Fees If the loan needs to be extended past its original term
These costs vary by lender and should be clearly outlined in the loan agreement.
What is the Difference Between a Mortgage Loan and a Home Loan?
A home loan is a general term that refers to any loan used for a purpose related to a home or residential property.
This could include:
Purchasing a home
Renovating a home
Building a new property
Consolidating debt with home-related intent
A mortgage loan is a specific type of home loan where a real estate property serves as collateral. If the borrower fails to repay, the lender can foreclose on the property to recover their funds.
There are several types of mortgage loans, including:
Conventional mortgages (issued by banks or credit unions)
Government-backed mortgages (FHA, VA, USDA)
Private mortgage loans (issued by private lenders or individuals)
Mortgage loans are almost always used to purchase, refinance, or leverage the equity in a property. They are structured with terms such as interest rates, amortization periods, and down payment requirements.
In essence, all mortgage loans are home loans, but not all home loans are mortgage loans.
How to Get a Private Mortgage Loan
If you’re interested in applying for a private mortgage loan, here’s how to get started:
1. Assess Your Needs. Know your property value, loan amount, and timeline.
2. Find a Reputable Lender. Research private lenders with experience in your property type.
3. Prepare Documentation. Include property details, proof of equity, and your exit strategy.
4. Negotiate Terms. Review interest rates, repayment period, and fees.
5. Close the Deal. Once terms are finalized, funding can happen quickly.
Alternatives to Private Mortgage Loans
If you're exploring your financing options and aren't sure a private mortgage loan is the best fit, here are several alternatives to consider:
1. Traditional Mortgage
Best for: Borrowers with strong credit and verifiable income.
Pros: Lower interest rates, longer repayment terms
Cons: Lengthy approval process, strict documentation
Use case: Primary home purchases or standard refinancing
2. FHA or VA Loans
Best for: First-time buyers, veterans, or those with lower credit scores
FHA Loans: Backed by the Federal Housing Administration, with low down payments (as low as 3.5%)
VA Loans: Exclusively for eligible veterans and active-duty service members, often with no down payment required
Pros: Easier qualification, competitive rates
Cons: Property must meet certain standards; usage restrictions apply
3. Hard Money Loans
Best for: Real estate investors and house flippers
Similar to private loans but often come from established lending companies focused on real estate deals
Pros: Fast approval, asset-based lending
Cons: High interest rates and short terms, just like private mortgages
Use case: Short-term investment properties or rehab projects
4. Home Equity Loans & HELOCs
Best for: Homeowners with substantial equity in their property
Home Equity Loan: Lump sum with fixed interest
HELOC (Home Equity Line of Credit): Revolving credit line, similar to a credit card
Pros: Lower interest rates, flexible usage
Cons: Puts your home at risk if you can't repay
Use case: Renovations, debt consolidation, or large expenses