Private Mortgage Lending

Well, it is not news that there is a lot of turmoil in many of the United States' real estate markets today. There is also a lot of misinformation and unknown information with regards to many of the sub-prime, Alt A and A paper loans that were originated in the past few years. If you own property in some of the states and counties that have been hardest hit it is likely that most hard money lenders will have increased requirements and may not be interested in lending on your property at all until the market settles out. This tightening of credit from the mortgage industry has led to a surge in the number of people seeking private mortgage loans.

A private mortgage loan is a specific type of asset based loan financing in which a borrower receives funds secured by the value of a parcel of real estate. Private mortgage loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are not issued by a bank, but an individual investor. A Private Mortgage Loan is sometimes called a Hard Money Loan. The mortgage is usually short-term, ranging from six months to three years. The amount of the loan is based on the property's equity value. Generally this amount is between 50 and 70 percent loan-to-value (LTV) of the property.

In the past, private mortgage lending used to consist of families and friends helping each other with house payments. Today there is the potential for profit in private mortgages for lenders. This investment strategy has been gaining notoriety in the investing community. Private mortgages have significant benefits for borrowers and investors. This type of loan allows borrowers who cannot qualify for a traditional mortgages to get a loan. Investors holding private mortgages can receive interest rates significantly higher than standard rates offered by banks, thus making more money safely as the property is collateral.

Any person who funds a private mortgage loan is subject to state and federal usury laws capping the amount of interest on a loan. Some state laws limit the number of private money loans an individual may offer without being licensing. I recommend that investors consult an experienced attorney regarding these matters. The United States Government does not regulate interest rates on private transactions. It does however define money lent at an interest rate more than two times the local state usury rate as an "unlawful debt". This type of "unlawful debt" is addressed under the Racketeer Influenced and Corruption Organizations (RICO) Act. Any loan exceeding, the two times the local state usury rate is a federal felony.

The benefits of being a private mortgage lender is diversification with a guaranteed rate of return. Many of these types of loans return 10 to 15 percent. In today's uncertain financial climate this is a great way to boost your income.

Learn more about this author, James Hewitt.
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