Private Mortgage Lenders: When They Make Sense

If you've been declined by banks or need creative financing solutions, private lenders may be an option worth exploring. This guide explains when private mortgages make sense—and when they don't—so you can make an informed decision.

What Is a Private Mortgage?

Private mortgages come from individual investors or private lending companies, not banks or credit unions. They're often called:

• Private financing
• Alternative lending
• B-lender mortgages (though B-lenders are slightly different)

When Private Lenders Make Sense

Legitimate scenarios:

1. Credit Challenges
If your credit score is below 600 and banks have declined you, private lenders focus more on property equity than credit history.

2. Self-Employment Income Issues
Traditional lenders want 2 years of tax returns. Private lenders may accept bank statements or contracts. See our self-employed mortgage guide for more options.

3. Urgent Timelines
Need to close quickly on an investment property or avoid losing a deal? Private lenders can fund in days, not weeks.

4. Debt Consolidation
If your debt ratios are too high for banks but you have home equity, private lending can consolidate debts.

5. Bridge Financing
When you're buying before selling, private bridge loans cover the gap. Learn more in our bridge financing guide.

Understanding Private Mortgage Rates

Private rates are higher because lenders take on more risk:

• Bank rates: 4.5% - 6%
• B-lender rates: 5.5% - 8%
• Private rates: 8% - 15%

You're paying for flexibility, not for the privilege of a high rate.

Private Mortgage Terms to Know

Interest-only payments: Many private mortgages are interest-only, meaning your balance doesn't decrease.

Shorter terms: Typically 1-2 years, not 5 years.

Lender fees: Expect 1-3% of the loan amount.

Broker fees: Private deals often require broker compensation.

The Exit Strategy: Critical

Private mortgages should be temporary. Before signing, you need a clear plan to:

• Rebuild credit for bank qualification
• Stabilize income documentation
• Refinance into conventional financing within 1-2 years

Without an exit strategy, you'll renew at high rates indefinitely.

Red Flags to Watch For

Avoid private lenders who:

• Pressure you into decisions
• Won't provide clear fee disclosure
• Don't explain the exit strategy
• Charge excessive fees (more than 4-5% total)
• Require all fees upfront before approval

Comparing Private vs B-Lender

Before going fully private, explore B-lenders:

Working with a Mortgage Broker

For private lending, a broker is essential:

• Access to reputable private lenders
• Negotiation on fees and rates
• Protection from predatory terms
• Help building your exit strategy

FAQ

Q: Can I get a private mortgage on a rental property?
A: Yes, private lenders often finance investment properties. In fact, they may prefer properties with rental income.

Q: Are private mortgages legal?
A: Absolutely. Private lending is a regulated industry. The key is working with reputable lenders and brokers.

Q: What's the maximum LTV for private mortgages?
A: Typically 75-80% of property value. Some lenders go higher but charge more.

Q: Can I pay off a private mortgage early?
A: Usually yes, but check for prepayment penalties. Most private lenders allow early payout with minimal fees.

Q: How fast can private lenders close?
A: As fast as 3-7 days in some cases, versus 2-4 weeks for banks.

What's Next

Private mortgages serve a purpose but aren't right for everyone. If you're struggling to qualify with traditional lenders, explore your options with our credit score improvement guide or discuss alternative solutions with our team.