Let’s clarify what a private mortgage loan is….
It is a loan that you (the Private Lender) would make to an investor that is secured 100% by a recorded mortgage lien against the actual property that we purchase with the proceeds from the loan. That gives you, as the private lender, security. The investor you work with should only need very low loan-to-value (LTV) ratio loans.
In my business, we will never exceed 75% LTV on the property we purchase, and this also includes the amount needed to fix the property. Banks and other lending institutions often make loans with an equity cushion of 10% or less whereas our typical cushion of equity is 25% to 50% LTV. This provides private lenders with tremendous security beyond that typically sought by institutional lenders.
It’s obvious why this is a much safer approach than most lending institutions take. By loaning 90%, 95%, or even 100% of the value of a home, banks simply don’t have any equity cushion or proper exit strategy. You as a private lender on the other hand shouldn’t be asked to loan money secured by real estate with an equity cushion of less than 25%. You should never make a loan that allows for less than this. We never violate this rule, and neither should the investors you work with.