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Private Mortgage: What You Should Know Before You Borrow

Feb 25, 2024



Your credit history is less than stellar, or your score is low. Or maybe you want to purchase a home in poor condition and flip it. Whatever the reason, you’re having a tough time getting a traditional loan to buy a house. In these instances, you may be considering a private mortgage. But beware, they may come with risks. Before considering private mortgages, it’s important to know what they are, who they come from and what to be aware of when considering this loan.

What Is A Private Mortgage?

A private mortgage is a financial arrangement between a borrower and a private, individual lender in which the lender provides financing to the borrower to purchase a home. Lenders often offer private mortgages to family, friends or others with personal relationships and generate investment profits from the interest. Some may consider this option because they may not qualify for a mortgage with a traditional lender or may wish to avoid some red tape during the buying process. The loan itself works like a regular mortgage – you must pay back the loan, plus interest, within a certain, agreed-upon time. The lender has a lien on your property, which can be foreclosed if you default on the loan.

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What’s The Difference Between A Private Home Loan And A Loan From A Traditional Lender?

A traditional loan is provided by a financial institution, like a bank or mortgage lender, and typically has a set of guidelines, restrictions and criteria a borrower must meet to get the loan, typically set by or with the consent of the federal government. This helps protect the lender and borrower. A private loan is provided by a person or company that creates their own rules, guidelines and qualification requirements, which could be different for each borrower. This makes the loan riskier for both parties involved.

A private loan can also be a non-arm’s length transaction, meaning you have a personal relationship with the lender. This happens when you get a private loan from a family member or friend. Another example of a non-arm’s length transaction in real estate is buying from a family member. When you get a traditional loan to purchase a home from someone you know, there are many more hoops to jump through, along with restrictions.

If you'd still like to pursue a loan from a traditional lender, you can always start the approval process to see what kind of rate you might qualify for and what your mortgage details might look like.

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Pros And Cons Of Private Mortgages For Buyers

Guidelines and restrictions are a big reason someone may look into getting a private home loan instead of one from a traditional mortgage lender. A private mortgage could be an option for borrowers who may have a hard time qualifying for a loan based on their financial situation, credit history and the type of home they wish to purchase. However, the loan can be riskier and can be damaging to finances and personal relationships. It’s a good idea to mull over the loan’s pros and cons and consult a financial professional before deciding that a private mortgage loan is the right option for you.


Using a private mortgage to purchase a home can seem attractive to home buyers because there are several pros to using this type of financing:

  • Easier to qualify: Since the lender can create their own rules, they may lend to people with lower credit scores or allow for a smaller down payment (with no required private mortgage insurance). However, if the borrower is getting the loan for those reasons, they may not be in a good financial position to purchase a home or take on any more debt. A private lender may also lend to a flipper looking to purchase a property in less-than-stellar condition if they see the project as profitable. However, issues could arise if the flip doesn’t go to plan and is less profitable as both parties thought.

  • Shorter approval process: Because it may be easier to qualify for a private mortgage than with other types of lenders, you may get to the closing table faster as there may be fewer hurdles, required documents and processes, like appraisals or inspections. However, inspections and appraisals are vital to ensuring the house is in good physical condition and is a good investment.

  • Flexibility: You may be able to better negotiate your terms, which can include a more flexible repayment plan, waived fees or lower interest rates.


Some homeowners determine that they’d be better off taking out a traditional mortgage because of the cons associated with using a private mortgage:

  • Fewer protections: Certain loan qualifications are in place to help protect the borrower and ensure they are in a good enough financial standing to be able to handle the debt and other obligations of the loan. That’s why traditional lenders require a certain credit score, proof of income and maximum debt-to-income ratio (DTI).

  • Shorter loan term: Private loans typically require you to pay your loan off in less time than a traditional 15- or 30-year mortgage. With less time to pay the loan off, your monthly payments will be higher, which could make it difficult to keep up. Many private lenders may also structure their loan as a balloon mortgage, which comes with lower monthly payments, but a hefty lump sum due in the middle or at the end of the loan term. If you don’t have the money due and can’t refinance the loan, you could lose your home.

  • Potentially damaging to personal relationships: It’s important to remember that a loan is a business transaction, whether you know the person or not. That means once you accept a loan from a family member or friend, they also become your lender, with a lien on your home. If you fall behind on payments or disagree with the way they are handling your loan, the relationship could sour fast. The situation could even end up in court or with your family member or friend seizing your home.

If you're not sold on a private mortgage, you might be able to find a good option from a traditional lender like Rocket Mortgage®. Research different loan types and see what you might qualify for before deciding what's right for you.

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Pros And Cons Of Private Mortgage Loans For Lenders

For those who have the capital and are interested in providing private loans, it’s equally important to weigh the pros and cons and consult a financial professional or real estate attorney before lending out money.


  • Opportunity to generate investment income: By charging an interest rate, you’ll get more money back than what you loaned to the borrower once the loan is paid back in full. That means you’ll get a return on investment.
  • Consistent cash flow: A regular repayment schedule creates a consistent cash flow every month for lenders. However, the money you have tied up in the loan could have been used for other investments or to pay for other expenses.
  • Security: A private mortgage loan uses the home as collateral, so it’s relatively secure. If the borrower defaults on the loan, you can foreclose on the home to secure the collateral.


  • Can be a riskier investment: Guidelines and restrictions are typically put in place to protect the borrower and lender. They help protect the lender from making a bad investment on a home in poor condition and decrease the risk of dealing with a borrower who defaults on their loan.
  • Difficult to diversify: Investing a large amount of money in a private mortgage could make it difficult to diversify your portfolio with other real estate investments.
  • You need a thick skin: If your borrower starts missing payments or defaults on their loan, what will you do? In worst cases, you may need to take legal action or take the home. This can be especially difficult if you have a personal relationship with the borrower.

How Does A Private Mortgage Work?

Since these types of loans can be riskier to both borrower and lender, it’s important to take the right steps and precautions to ensure the transaction is smooth and both parties are in a position to be successful with the loan.

Find A Private Mortgage Lender

Along with asking family and friends, who may loan you the money or know someone who can, you can ask your real estate agent or other industry professionals or search online. While shopping around for the right private lender, make sure you review their website and look at any reviews they may have. Along with great reviews, you’ll also want to look for a lender that may provide low interest rates, has an easy application or lower credit score requirements, fast closing times or types of terms you need. While much of what you look for in a private lender may have to do with your goals, it’s important that you work with a lender you trust.

Stake Out The Terms Of Your Agreement

Since private lenders create their own guidelines, you may be able to negotiate some of the terms of your loan, including down payment, interest rate and loan term. However, tread lightly here, especially if you have a personal relationship with the lender. As you come to an agreement on terms, you’ll want to understand the implications of the length of your loan, the amortization schedule and other important loan details before you sign anything, which brings us to our next tip.

Consult A Real Estate Professional

A real estate attorney is a good person to use to help draft your private mortgage agreement and work through the loan process with you. Using their industry knowledge, a real estate attorney can help you understand the legal jargon, look for any red flags and ensure all of the proper paperwork and processes are being done correctly. They can ensure, too, that the transaction is equally beneficial for both parties.

Assemble Your Paperwork

When it comes to financial agreements, especially those involving a substantial amount of money, a handshake agreement won’t cut it – even when it’s made between friends and family. Make sure you have all the right paperwork to make the transaction legal and binding. Such paperwork includes:

  • A promissory note, or mortgage note, which shows you agree to pay back the loan by its maturity date. This may include the terms of the loan, including the loan balance, monthly payment, interest rate, payment schedule and penalties the lender may impose if you’re late on payments or default on the loan.

  • A deed of trust or mortgage, which states that the lender will hold the title of the home until the loan is paid in full. It’s a contract that puts a lien on the property. It makes it so the lender can foreclose on your home if you default on the loan.

Alternatives To A Private Mortgage Loan

If you’re considering a private home loan for financial reasons, now may not be the right time for you to take on additional debt. If you don’t have enough money for a 3% – 5% down payment, take some time to save up some money. If you don’t meet the credit requirement for a conventional loan, consider a Federal Housing Administration (FHA) loan, which has a lower credit score requirement. Or take the time you need to build your credit. A higher score can also get you more favorable terms. If you wish to flip a home, learn about other options, like cash-out refinances or home equity loans.

The Bottom Line: Is A Private Mortgage Worth It?

A private mortgage provides the financing for purchasing a home and comes from an individual or company that isn’t a bank or traditional mortgage lender. Private mortgages are often provided by a family member, friend or other person with a personal relationship to the borrower. Typically, a private mortgage lender creates their own guidelines and terms of the loans, which can make it easier to qualify for the loan. This can be a good option for someone who may not qualify for a traditional mortgage or a buyer who wishes to flip a house. However, there are several financial and personal risks for both lender and borrower. It’s important to consider the pros and cons and speak to a real estate attorney before using a private loan to make sure it’s the right option for you.

If you’re looking to buy a home with a traditional loan instead of a private mortgage, get approved with Rocket Mortgage today. You can also give us a call at (833) 326-6018.

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Lauren Nowacki

Lauren is a Content Editor specializing in personal finance and the mortgage industry. Her writing focuses on reporting the best places to live in the U.S. based on certain interests and lifestyles. She has a B.A. in Communications from Alma College and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.