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With a private mortgage, you don’t borrow from a bank. Instead, you borrow from another person or business. Whether it’s your only option, or one of many, you should understand how a private mortgage works. Find out what it takes to successfully use a private mortgage.

What do you need for a good private mortgage? Start with the following items, and you’ll be on your way to a win-win situation.

Understand the Risks of a Private Mortgage

Any private mortgage can go bad. Life can always bring surprises. Consider what would happen:

• How will the personal relationship between borrower and lender change?
• Will the lender’s financial security (retirement, risk of bankruptcy, etc) be affected?
• Who else may suffer if the loan is not repaid?

A private mortgage lender is always taking a risk. Ignoring relationship issues, the deal can go bad if you fail to consider:

• Is the property in good condition?
• Will the property be adequately insured and cared for?
• Is there any other lien, mortgage, or interest conflicting with the private mortgage lender’s interest?

Private Mortgage Agreements

Any private mortgage should be documented. Use a loan agreement that clearly sets everybody’s expectations. Documentation protects each party to a private mortgage, and may help with tax and legal issues. Spell out every detail, including:

• When are payments due?
• What if payments aren’t received?
• How/where should payments be made?
• Can the borrower prepay?
• Is the loan secured?

Securing the Loan

It’s a good idea to secure the lender’s interest - even if you do a private mortgage among close friends or family members. That way, the lender can take the property and get some money back in a worst-case-scenario.

For example, a borrower (who has the ability and every intention to repay) may die or get sued. If the property is held in the borrower’s name without a properly filed lien, their creditors can go after their home or pressure them to use the home’s value. A secured private mortgage helps protect the lender’s interest.

Securing the property may also help you save on taxes.

How to do a Private Mortgage Correctly

You have to think about unpleasant possibilities when considering a private mortgage. Imagine what could go wrong and how it would affect you.

For documentation, work with qualified experts. Talk to local attorneys, your tax preparer, and others who can help you through the process.