What Is a Private Mortgage Lender?

When most people think about getting a mortgage, they picture a bank or credit union. But there’s another option that can make sense in certain situations: private mortgage lenders.

A private lender can be an individual investor or an investment corporation that lends money using real estate as collateral. Like a traditional lender, they register a mortgage on the property and set up regular loan payments — but their approach is often very different.

How Private Lenders Differ from Banks

Banks are highly regulated and rely on strict formulas based on income, credit scores, and stress testing. Private lenders, on the other hand, tend to focus more on the value of the property itself and the amount of equity involved.

Because they aren’t bound by the same red tape, private lenders can be more flexible. They’re often willing to consider unique situations that don’t fit neatly into a bank’s approval model. There’s also a middle ground known as alternative lenders (such as mortgage investment corporations), which offer more flexibility than banks while still maintaining oversight and reporting standards.

Qualification and the Stress Test

One key difference is that the mortgage stress test does not apply to private lenders. However, that doesn’t mean there’s no due diligence. Private lenders still want to understand how the loan will be repaid and what the borrower’s exit strategy is — whether that’s refinancing with a bank, selling the property, or paying the loan off another way.

Insurance and Loan Terms

Property insurance is always required, regardless of who your lender is. Private mortgages are typically short-term, often around 12 months. They can be structured as either open (allowing early repayment without penalty) or closed (with a penalty, usually three months’ interest, for early repayment).

Interest rates are generally higher than bank mortgages, reflecting the increased flexibility and risk.

Who Uses Private Lenders?

Private lenders can be a fit for many borrowers, but most require 20–25% equity in the property. Common scenarios include:

• Buyers needing fast approvals

• Borrowers declined by traditional lenders

• Short-term or bridge financing

• Self-employed individuals

• Buyers or investors needing higher leverage

Why Choose a Private Lender?

Speed and flexibility are the biggest advantages. Approvals can sometimes happen within days — or even hours — compared to weeks with a bank. Private lenders are often used as temporary solutions, helping borrowers bridge gaps until they can secure traditional financing.

Should You Use a Broker?

Yes. A licensed mortgage broker understands the private lending landscape, can match you with the right lender, explain the risks and costs, and ensure everything is done properly.

Final Thoughts

Private mortgage lenders play an increasingly important role in today’s real estate market, especially when timing, flexibility, or unique circumstances are involved. If you’re unsure which financing route makes the most sense, speak with your REALTOR®, who can connect you with trusted mortgage and financial professionals to help guide your decision.