Private Mortgage Investors Instead of Banks

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What are private mortgage investors?


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Most mortgages are held by banks or other financial institutions. Increasingly, however, individual persons are choosing to hold mortgages directly, mostly because the investment returns that can be made on interest.

Typically, the holder of a private mortgage is the seller of the home. In this instance, the owner sells you the home and carries back a mortgage and a note on which you make payments. If you default, the mortgage allows the owner to foreclose on the house, just as if he or she were a commercial lending institution. This is an easy way for a homeowner to sell his or her home in a sluggish market and get all of his or her asking price. It’s beneficial to the buyer, who doesn’t have to undergo an extensive credit and finance check. The downside to being a seller who is holding a mortgage is that he or she must wait for the money. If a seller doesn’t have the ability to do that, then he or she may sell the mortgage to a third party private mortgage investor.

Mortgages are negotiable instruments, and they can be bought and sold on the open market like stocks or bonds. The advantage to seller is that he or she gets the lump sum of cash, but the advantages to the private mortgage investor are even better. Usually, mortgages sell for a discount of their face value (less than the amount of the principal). This means that not only does the investor get to collect interest on the note, but he or she actually makes a profit on the principle amount.

Sometimes, a third-party private investor will offer a mortgage to a home buyer. In this situation, the investor is not the owner of the home, rather it is a person who lends the buyer the money to purchase to the home and takes back a promissory note, secured by a mortgage, just like a bank or financial institution would do. Like a bank, the third party investor makes money on collecting interest.

Potentially, private mortgage investors can make more money from a private mortgage than a bank could from a traditional mortgage because they can charge higher interest rates. They charge higher interest rates because they take on greater risk in lending to people who can’t qualify for traditional mortgages. Usually private mortgage lenders work with people who have sub-prime credit, but they may also work with risky projects regardless of credit. For instance, commercial construction loans for unestablished businesses may be financed through private mortgage investors.

If you are just looking for an owner who will finance your purchase, check the for sale by owner ads. Most owners will say in the ad whether they are willing to finance the purchase. If you have your heart set on a house that is not FSBO or the owner hasn’t mentioned it, ask. It’s not something that people think of right away, but many people are open to it once it is explained to them. Particularly once they realize they can sell the mortgage if they need to get out. Otherwise, ask your agent to do some research on the internet or do it yourself. You could try contacting an investment firm which may be able to put you in touch with private mortgage sources.

Answered over 8 years ago
Anonymous

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