A private party mortgage is a type of seller financing that allows the buyer to completely avoid traditional lenders. Instead, the seller personally finances the entire home loan minus any down payment from the buyer.
How Does a Private Party Mortgage Work?
Complete private party financing only works when a seller owns his own home, without any mortgage liens. The details of private party mortgages are determined by the parties involved. However, these deals usually work similarly to traditional loans. At closing, the property title is transferred from the seller to the buyer. In return, the seller is given a promissory note for the total amount owed.
Each month, the buyer sends the seller a mortgage payment. Often, these payments are facilitated by a third-party note servicer (such as NoteWorld). If the buyer defaults on the loan, the seller may foreclose on the property.
How to Qualify?
Unlike traditional loans, private party mortgages have no set qualification requirements. Any qualifications are established personally by the seller and may be open to negotiation. Generally, sellers know that buyers seeking private party mortgages have poor credit, undocumented income, or other issues that exclude them from traditional lending. While sellers are often willing to overlook these problems, they almost always require a down payment. This upfront money helps sellers feel confident that the buyers have some incentive to make their monthly payments.
Where to Find Private Party Mortgages
Finding 100% private party mortgages is very difficult. You need to find sellers who not only own their homes completely but are also willing to go without receiving an upfront sum of cash. Try searching for-sale-by-owner properties in established neighborhoods, where many residents have lived for 20-30 years. You may also want to find a local real estate agent who is experienced with seller financing deals.
If you find a seller who is leery of lending, you may be able to convince him to enter into a simultaneous closing deal. Simultaneous closing allows the homeowner to walk away from the closing table with cash for the property. Basically, it allows several transactions to happen “simultaneously” at closing: the buyer purchases the property, the seller is given a promissory note for financing the property, and the seller instantly sells that note to an investor for cash. Sellers can get more information about simultaneous closings by talking to a note buying company or title company.
If finding a private party seller proves too challenging, there are several alternatives. You may want to look into other seller financing possibilities such as assumable mortgages and seller carry back loans.