Basing from strict lending policy, the banks and financial institutions qualify the borrower to fund the mortgage. The borrowers with good credit history will qualify for financing. When the banks and financial institutions reject the financing, the borrowers turn into private mortgages.
Instead of banks and financial institutions, the private individuals, sellers, or investors lend to the borrower for mortgage refinancing. Thus, it is called private mortgages. Sometimes, the private mortgages are also called hard money mortgages.
In the United States, the private mortgages are well known. Even though the private mortgages exist in Canada for a long time, the private mortgages are only starting to be well known.
The private mortgage lenders hold the title or deeds of the property until the borrower pays off the entire loan. If the borrower defaults on the mortgage payment, the private mortgage lenders foreclose the property for resale.
The private mortgage clauses can include balloon mortgage payment. At the maturity of the mortgage, the borrower pays the large final mortgage payment to pay off the mortgage. This is more commonly known as balloon mortgage payment.
There are many ways to tarnish the credit ratings. When the borrowers suffer from bad credit ratings, the banks and financial institutions reject the mortgage financing. Thereby, the credit ratings remain stagnant. The credit ratings stay bad for a very long time.
In a way, the private mortgages help to repair bad credit rating. The private mortgage lenders take the risk to lend to the borrower with bad credit ratings. As the borrower pays the mortgage, the borrower rebuilds the good credit rating and builds the equity.
Higher risks means higher returns. The private mortgage lenders charge higher interest rate for riskier mortgage financing. As the borrower improves the credit rating, the borrower can switch to the conventional mortgage with lower interest rate.
The private mortgages are for select type of borrower. The borrowers are facing foreclosure, defaulting mortgage payments, failing mortgage application, and needing quick close.
The borrower also needs the equity to qualify for private mortgages. The private mortgage lenders accept up to seventy percent loan to value ratio. For example, the home is appraised for $350,000. The private mortgage lenders can lend up to $245,000 ($350,000 x 70%).