Private Mortgage Agreement Template & Guide

A private mortgage agreement lets two people finance a property sale without a bank in the middle. A parent helps a child buy a first home, a seller carries the financing to close a deal faster, or an investor lends against real estate for a return better than a savings account. In each case the loan is secured by the property itself, which is what separates a private mortgage from a plain personal loan.

Done right, a private mortgage protects the lender's money and gives the borrower clear, fair terms. Done sloppily, it leaves the lender with an unsecured IOU and the borrower with no idea what happens if a payment is late. This guide walks through what the agreement actually consists of, the terms that matter most, and how to put it on record so it holds up.

What is a private mortgage?

A private mortgage is a loan to buy or refinance real estate where the lender is a private party rather than a bank or licensed mortgage company. The lender can be a family member, a friend, the property seller, or a private investor. The borrower repays in installments, usually with interest, and the property is the collateral.

The word "mortgage" is doing two jobs in everyday speech. The full arrangement is made of two distinct legal pieces:

• The promissory note. The borrower's written promise to repay a specific sum on specific terms.
• The mortgage or deed of trust. The security instrument that ties the debt to the property and lets the lender foreclose if the borrower defaults.

People often say "private mortgage" to mean the whole package, but when you sit down to write it, you are really preparing two documents that reference each other. Skipping the second one is the most common mistake, and it is the difference between a secured loan and an unsecured promise.

When a private mortgage makes sense

Private mortgages show up in a handful of recurring situations:

• Seller financing. The seller acts as the lender and the buyer pays the seller directly over time. This widens the buyer pool and can speed up a sale, especially for unusual properties that banks hesitate to underwrite.
• Family lending. A relative funds part or all of a home purchase. Securing the loan with the property keeps the arrangement businesslike and protects the lender's estate.
• Investor lending. A private investor lends against real estate for a fixed return, accepting the property as collateral instead of buying stocks or bonds.
• Refinancing a hard-to-bank borrower. Someone who is self-employed or rebuilding credit may not qualify with a traditional lender but can agree to clear private terms.

If the property is not the collateral, you are not writing a mortgage at all. You may simply want a loan agreement or, for a smaller informal sum, a promissory note. The line between those documents trips people up, so it helps to read up on when to use a loan agreement versus a promissory note before deciding which path fits.

The two documents you actually need

The promissory note

The note is the debt itself. It should state, in plain terms:

• The principal, meaning the exact amount being borrowed.
• The interest rate, and whether it is fixed or adjustable.
• The payment schedule: amount, due date, and frequency.
• The maturity date, when the loan must be paid in full.
• Whether there is a balloon payment at the end.
• The prepayment terms. Can the borrower pay early without penalty?
• What counts as default, and the late fees that apply.

The security instrument

The mortgage or deed of trust is what makes the loan "secured." Which one you use depends on your state: roughly half use mortgages, the other half use deeds of trust, and a few use a security deed. The mechanics differ, but the purpose is identical, putting a lien on the property so the lender can foreclose if the borrower stops paying. If you are unsure which applies, the comparison of a security deed versus a mortgage breaks down the state-by-state differences.

The security instrument identifies the property by its legal description (not just the street address), names the borrower and lender, references the promissory note it secures, and spells out the lender's rights on default. This is the document that gets recorded with the county.

Key terms to negotiate

Interest rate

Private lenders set their own rate within legal limits. Two ceilings apply. First, every state has a usury cap that limits how much interest an unlicensed lender can charge, often somewhere between 8 and 16 percent. Charging above it can wipe out the interest or trigger penalties. Second, for loans between family members, the IRS publishes monthly Applicable Federal Rates; charging less than the AFR can create imputed-interest tax issues for the lender. A rate that respects both ceilings keeps the deal clean.

Term and amortization

Decide how long the loan runs and how the payments are structured. A fully amortizing loan pays off the entire balance over the term. Many private mortgages instead use a shorter term with a balloon payment, where the borrower makes smaller monthly payments and then owes the remaining balance in a lump sum, often by refinancing into a bank loan once they qualify.

Down payment and loan-to-value

The borrower's down payment determines how much equity cushions the lender. A larger down payment lowers the lender's risk because there is more equity protecting the loan if the property has to be sold.

Default and remedies

Define exactly what default means (a missed payment, an unpaid property tax bill, lapsed insurance) and what the lender can do about it. Spell out the notice the lender must give, the cure period the borrower gets, and the path to foreclosure. State law governs the foreclosure process itself, so these terms have to line up with local rules.

Insurance, taxes, and escrow

The agreement should require the borrower to keep the property insured and the property taxes current, and to name the lender on the insurance policy. Lenders sometimes collect taxes and insurance through an escrow account to be sure they get paid.

How to write a private mortgage agreement, step by step

1. Agree on the business terms first. Settle the amount, interest rate, term, payment schedule, and any balloon or down payment before drafting anything. Put the numbers in writing so both sides start from the same page.
2. Draft the promissory note. Capture the principal, rate, schedule, maturity date, late fees, and default terms. Keep the language plain and unambiguous.
3. Prepare the security instrument. Use the mortgage, deed of trust, or security deed that your state requires. Include the property's full legal description and a reference to the note it secures.
4. Confirm the legal description. Pull it from the current deed or the county records, not from a listing. An incorrect description can cloud the lien.
5. Have both parties sign. The note is signed by the borrower. The security instrument is signed by the borrower and, in most states, notarized so it can be recorded.
6. Record the security instrument. File the mortgage or deed of trust with the county recorder or clerk where the property sits. Recording protects the lender's lien priority.
7. Set up payment and bookkeeping. Decide how payments are made and keep a running record of principal, interest, and balance. A neutral loan-servicing company can handle this for a small fee and is worth considering for family deals.

Common mistakes to avoid

• Writing only the note and skipping the mortgage. Without a recorded security instrument, the lender has an unsecured loan and no right to the property if things go wrong.
• Using the street address instead of the legal description. The lien attaches to a legally described parcel, and a vague description can make it unenforceable.
• Forgetting to record. An unrecorded mortgage may be valid between the two parties but can lose priority to later creditors or a buyer.
• Ignoring the usury cap. An interest rate above the state limit can void the interest entirely and expose the lender to penalties.
• Leaving out default and notice terms. If the documents are silent on what happens after a missed payment, the lender's options narrow and disputes get expensive.
• No insurance or tax requirement. If the borrower lets insurance lapse or stops paying property taxes, the collateral can be damaged or sold at a tax sale, undermining the lender's security.

Tax and reporting considerations

A private mortgage has tax consequences for both sides, and a few minutes of planning avoids surprises at filing time.

For the lender, the interest you collect is taxable income and needs to be reported. If you hold the loan as a business, you may also need to issue tax forms. For the borrower, mortgage interest on a primary or second home can be deductible, but only if the loan is properly secured by the property, which is another reason recording the security instrument matters.

Family deals carry an extra wrinkle. If you charge no interest or a rate below the IRS Applicable Federal Rate, the IRS can treat the difference as imputed interest and, in some cases, as a gift. Setting a rate at or above the AFR keeps the loan a loan in the eyes of the tax authorities. When the amounts are large, it is worth a short conversation with an accountant before you sign.

Protecting both parties

A private mortgage is a long relationship, sometimes 15 or 30 years, so the agreement should protect both sides rather than just the lender.

• For the lender: record the lien, require proof of insurance and tax payments, and keep clean records of every payment received.
• For the borrower: insist on a clear payoff statement at maturity, a written release of the lien once the loan is paid, and confirmation that early payoff is allowed without penalty if that is what you agreed.

Both parties benefit from using a neutral third party, a title company or a loan-servicing firm, to handle payments and recordkeeping. It removes the awkwardness of one family member chasing another for money and creates an independent record if a dispute ever arises. For loans between people who know each other well, that small step often preserves the relationship as much as it protects the money, the same principle that applies to any personal loan between friends.

Private mortgage vs. other financing tools

A private mortgage is not the only way to finance a property between private parties. A contract for deed, also called a land contract, keeps legal title with the seller until the buyer finishes paying, rather than transferring title up front with a lien attached. The mechanics and the buyer's protections differ in important ways, which the guide to a contract for deed and land contracts explains in detail. The right choice depends on how much protection each side wants and how your state treats each structure.

Related guides

• Gift Letter Template for a Mortgage
• Private Investigator Contract Template
• Satisfaction of Mortgage: Filing a Release
• Rescinding a Mortgage Loan: A Comprehensive Guide
• Real Estate Financing: Security Deed vs Mortgage

Generate Your Private Mortgage Agreement with Contractable

A private mortgage only works when the note and the security instrument are written clearly and tailored to your terms. Instead of stitching together a generic form, you can describe your deal, the amount, rate, term, and property, and let Contractable draft an agreement built around it. You stay in control of the terms, and you start from a document that covers the clauses that actually matter, so you can take it to a local attorney or title company for a final check with confidence.