Private mortgage lending is real estate financing funded by non-bank sources, either individual investors or private lending firms, with the property serving as collateral. First-lien interest rates typically run between 9.5% and 12%, loan terms are measured in months rather than decades, and the property’s value carries more weight in underwriting than the borrower’s credit profile. People turn to it when they can’t qualify through a bank or need to close faster than an institutional timeline allows. The trade-offs are higher cost, shorter terms, and, for many of these loans, fewer built-in consumer protections.
Who the Lenders Are
Two groups make up this market. The first is individual investors, sometimes called trust deed investors, who lend their own money and collect interest as a return. Some run a small portfolio alone; others pool money through informal investment groups. The second is organized private lending firms, often called hard money lenders, which aggregate capital from multiple investors and operate as LLCs or private corporations built for asset-based lending.
Neither type takes consumer deposits, and neither is supervised the way a chartered bank is. That shifts the regulatory picture toward federal consumer protection statutes and state licensing law rather than prudential banking oversight, which matters most when the loan is being made to a consumer.
Consumer Loans vs. Business-Purpose Loans
This one distinction shapes nearly every rule that follows. Federal consumer protection laws, including the Truth in Lending Act and the Dodd-Frank ability-to-repay requirements, apply to consumer credit transactions secured by a dwelling. A loan to buy or refinance your personal residence is a consumer transaction. A loan to purchase an investment property or fund a commercial rehab project generally is not.
Regulation Z explicitly exempts extensions of credit made primarily for a business, commercial, or agricultural purpose from most of its requirements.1Consumer Financial Protection Bureau. 12 CFR 1026.3 – Exempt Transactions That covers a large share of the private lending market, since many hard money loans fund fix-and-flip projects, rental acquisitions, and other investment activity. When a loan qualifies as business-purpose, the lender has no federal obligation to provide TILA disclosures, follow ability-to-repay underwriting standards, or comply with prepayment penalty restrictions. Those loans are governed by the contract and whatever state-level requirements apply.
If you’re borrowing against your primary residence for personal reasons, the full weight of federal consumer protection law applies. If you’re funding a real estate investment, most of it doesn’t.
Federal Protections on Consumer Loans
Truth in Lending Disclosures
The Truth in Lending Act requires lenders to disclose the annual percentage rate, total finance charges, and other key credit terms before a borrower commits.2Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose The point is to let you compare offers on equal footing. For private lenders making consumer loans, that means producing the same standardized disclosures a bank would.
Borrowers who take out a consumer loan secured by their principal residence also get a three-day right of rescission. You can cancel until midnight of the third business day after closing. If the lender fails to deliver the required disclosures, the rescission window extends to three years from closing.3Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions
A borrower who sues over a TILA violation on a dwelling-secured loan can recover between $400 and $4,000 in statutory damages per individual action, plus actual damages and attorney fees. For violations of the enhanced requirements that apply to certain high-cost mortgages, the penalty can equal the sum of all finance charges and fees the borrower paid over the life of the loan. Class actions carry exposure up to $1,000,000 or one percent of the lender’s net worth, whichever is less.4Office of the Law Revision Counsel. 15 USC 1640 – Civil Liability
RESPA and Settlement Practices
The Real Estate Settlement Procedures Act requires clear settlement cost disclosures and prohibits kickbacks or fee-splitting where no actual service is performed.5Office of the Law Revision Counsel. 12 USC 2601 – Congressional Findings and Purpose The anti-kickback provision at 12 U.S.C. § 2607 reaches anyone involved in a federally related mortgage loan settlement.6Office of the Law Revision Counsel. 12 USC 2607 – Prohibition Against Kickbacks and Unearned Fees
Ability to Repay
For consumer loans secured by a dwelling, the lender must make a reasonable, good-faith determination that you can repay the loan before funding it. That means evaluating income, employment, debts, and monthly obligations rather than relying on the property’s value alone. Bridge loans of 12 months or less, reverse mortgages, and construction-phase financing are exempt from the analysis.7eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling
None of these federal protections attach to business-purpose loans. A private lender funding your investment property purchase has no federal obligation to verify your income, provide standardized disclosures, or run an ability-to-repay analysis.
State Licensing and Usury Limits
Federal law sets the floor. States add their own rules on who can originate and what they can charge.
Under the SAFE Mortgage Licensing Act, anyone who habitually or repeatedly takes residential mortgage loan applications and negotiates loan terms for compensation must register through the Nationwide Multistate Licensing System and obtain a state loan originator license. An individual who finances the sale of their own property once generally falls outside that requirement, but someone who makes it a recurring business does not.8eCFR. 12 CFR Part 1008 – SAFE Mortgage Licensing Act States often add background checks, minimum net worth thresholds, and bonding requirements. Unlicensed lending in the consumer mortgage space can carry civil penalties and, depending on the jurisdiction, criminal exposure.
Most states cap the maximum interest rate on consumer loans, but the exceptions are wide. Federal law preempts state usury limits for first-lien residential mortgages in many circumstances. A majority of states exempt business-purpose loans from their usury caps, and some exempt any loan secured by a first mortgage regardless of purpose. Private mortgage rates of 9.5% to 12% rarely trigger usury issues in practice, but the exemptions vary state to state, and a loan structured in violation of an applicable usury statute can be voided in some jurisdictions, with the lender losing the right to collect both principal and interest.
Rates, Fees, and Loan Structure
Private loans cost more than conventional financing, and the structure is different too.
- First-lien private loans typically carry rates between 9.5% and 12%. Second-lien positions run higher, often 12% to 14%, reflecting the added risk of sitting behind another lender.
- Origination fees usually run 1 to 4 points, with 2 to 3 points most common. On a $300,000 loan, that’s $6,000 to $9,000 up front.
- Terms typically run 6 months to 3 years. The expectation is that you’ll refinance into a conventional loan, sell the property, or otherwise pay off the balance before the term expires.
- Most private mortgages are interest-only monthly with a balloon payment of the entire principal at maturity. Miss the exit and you’re in default even if you made every monthly payment on time.
Loan-to-value is the lender’s main risk control. Private lenders typically cap LTV between 60% and 75%, meaning they’ll lend no more than 60 to 75 cents for every dollar of property value. The lower the LTV, the more equity cushion protects the lender if values drop or the borrower defaults.
What You’ll Need to Document
Private lenders focus on the property first and the borrower second, but they still want a documentation package.
- A current appraisal from a licensed or certified appraiser sets the market value and determines the maximum loan amount at the lender’s LTV cap. For consumer loans classified as higher-risk mortgages, federal law requires a written appraisal meeting specific independence standards. A standard single-family residential appraisal generally runs $300 to $600, with complex or multi-unit properties higher.9Office of the Law Revision Counsel. 15 USC 1639h – Property Appraisal Requirements
- A preliminary title report confirms whether the property carries any existing liens, easements, or legal claims that could affect the lender’s security interest. No serious lender funds without one.
- Bank statements from the previous two to three months showing you can cover closing costs, prepaid interest, and a reserve. Private lenders care less about your credit score than whether you have skin in the game.
- A concrete exit strategy: the projected sale price and renovation timeline for a fix-and-flip, or the conventional refinance you expect to close. A vague answer here is the fastest way to a decline.
Some private lenders use the Uniform Residential Loan Application (Fannie Mae Form 1003).10Fannie Mae. Uniform Residential Loan Application – Fannie Mae Form 1003 Others use their own in-house application, particularly for business-purpose loans where the 1003 is more detailed than the transaction needs.
Closing and Funding
Once underwriting wraps, the process moves quickly compared to conventional lending. The lender issues a commitment letter specifying the interest rate, term, origination fee, and any conditions that must be satisfied before funding. Read it against whatever terms you were quoted verbally. Discrepancies are common, and this is your last real chance to negotiate.
An escrow officer or closing attorney then prepares the legal documents. The two essentials are the promissory note, which is your personal promise to repay, and the deed of trust or mortgage, which pledges the property as security. Both parties sign at a title company or before a notary. The deed of trust is recorded with the county recorder, which puts the lender’s lien on public record. Funds are wired once the title company confirms all conditions are met and recording is complete.
Most private lenders require a lender’s title insurance policy before funding. It protects the lender against defects in the property’s title that the title search missed, such as undisclosed liens, forged documents in the chain of title, or boundary disputes. A lender’s policy covers only the lender’s interest, not your equity. Protection for your own stake requires a separate owner’s title insurance policy at your own expense.11Consumer Financial Protection Bureau. What Is Lender’s Title Insurance?
Budget also for recording fees (usually $10 to over $100 depending on the county), notary fees, and any escrow or closing attorney charges. The total closing cost picture can surprise borrowers used to conventional lending, where some of these costs get folded in or absorbed by the lender.
Prepayment Penalties
Federal prepayment penalty rules apply only to consumer loans secured by a dwelling. For qualifying consumer loans, a prepayment penalty is allowed only if the loan carries a fixed rate, qualifies as a qualified mortgage, and is not a higher-priced mortgage loan. Even then, the penalty is capped at 2% of the outstanding balance during the first two years and 1% during the third year, and no prepayment penalty is permitted after three years.12eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Most private consumer mortgage loans don’t meet the qualified mortgage definition, which effectively bars prepayment penalties on those loans.
Business-purpose loans face no federal prepayment restrictions. Any limits come from the contract and state law. Some private lenders impose steep prepayment penalties or guaranteed-interest minimums that can cost thousands if you pay off early. Read the prepayment clause before signing.
Tax Reporting on Both Sides
Private mortgage loans create tax obligations that are easy to overlook.
Interest income from a private mortgage is taxable to the lender. If you’re in the business of lending and receive $600 or more in mortgage interest from an individual borrower during the year, you must file Form 1098 reporting that interest. The “in the course of a trade or business” qualifier matters. If you sold your own home and carried back a mortgage for the buyer, the IRS does not require Form 1098 because the interest wasn’t received in the course of a trade or business.13Internal Revenue Service. Instructions for Form 1098 The tax on the interest income is still owed either way.
Borrowers paying interest on a private mortgage may deduct that interest on their federal return, just as with a bank mortgage. If the lender doesn’t issue a Form 1098, you report the interest on Schedule A, line 8b, and must include the lender’s name, address, and taxpayer identification number. A $50 penalty applies for each failure to provide this information.14Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction Get the lender’s TIN before closing using IRS Form W-9.
If you lend money to a family member at a rate below the IRS Applicable Federal Rate, the IRS may treat the forgone interest as a taxable gift. The AFR changes monthly; for April 2026, the long-term AFR (relevant to most mortgage-length loans) is 4.62% compounded annually.15Internal Revenue Service. Rev. Rul. 2026-7 – Applicable Federal Rates16Internal Revenue Service. Gifts and Inheritances17Internal Revenue Service. What’s New – Estate and Gift Tax Charging at least the AFR eliminates the issue.
Default and Foreclosure
If a borrower stops paying, the lender’s primary remedy is foreclosure. Timeline and procedure depend on state law and on how the loan is structured.
Judicial foreclosure states require the lender to file a lawsuit and obtain a court order before selling the property, which can take months to years. Non-judicial foreclosure states let the lender follow a statutory notice procedure and sell through a trustee’s sale without court involvement. The choice often tracks whether the loan is secured by a mortgage (typically judicial) or a deed of trust with a power-of-sale clause (non-judicial where allowed).
Federal regulation prohibits a loan servicer from filing the first notice or initiating any foreclosure proceeding until the borrower is more than 120 days delinquent.18eCFR. 12 CFR 1024.41 – Loss Mitigation Procedures This applies to servicers of federally related mortgage loans. A private lender who services their own non-federally-related loan may not be bound by it, but many private loan agreements include their own notice and cure periods. Check the default provisions in the promissory note and deed of trust for your actual timeline.
When a foreclosure sale brings less than the outstanding balance, the shortfall is called a deficiency. Whether the lender can pursue you personally for it depends entirely on state law. Some states bar deficiency judgments outright or limit them to certain foreclosure types. Others allow the lender to sue for the full difference. A handful cap the deficiency at the gap between the loan balance and the property’s fair market value rather than the sale price. Understand your exposure before signing.
Private lenders face the same foreclosure rules as institutional lenders, but they’re often less experienced with the procedural requirements. A foreclosure that skips proper notice or service can be challenged and potentially set aside, which is costly for both sides. A lender’s inexperience doesn’t erase the lender’s rights; it just means the process can get messier before it ends.