Private Mortgage Notes—A Millennial Homebuyer’s Secret Weapon

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As the children of the 1980s and 1990s get older, data shows millennials have one thing on their minds — buying a home. The vast majority of the home buying market — roughly 35 percent, according to a 2016 study from the National Association of Realtors — are millennials, and most of them cited a desire to own a home as their top reason for shopping.

But buying a home isn’t easy, as first-time homebuyers are quickly finding out. Mounting student loan debts combined with outstanding credit card bills, or even a lack of credit altogether, is making it harder for Generation Y to secure mortgages from banks. Many are getting around the rigorous mortgage approval process, however, by taking on private mortgage notes.

What is a Private Mortgage Note?

A private mortgage note is an alternative to a traditional mortgage, in which a private person or entity like a home seller finances a buyer’s purchase of a property rather than a bank.

A mortgage note is a legal document describing the details of a mortgage, including the purchase price of the property, the repayment schedule and interest rate. Traditionally, if a bank issues a homebuyer a mortgage, the bank holds the note and collects mortgage payments. In an alternative mortgage, the buyer makes mortgage payments to the seller, who holds the note.

Only homeowners who have paid for their property in full can offer a future buyer a private mortgage note. Noteholders may also sell their notes to another person or company. As a buyer looking at a home with a private mortgage note, you may interact with either group. Private mortgage notes are an effective alternative to traditional mortgages because typically a private person or company won’t have as many restrictions as a bank.

Millennials and Private Mortgage Notes

In a tough housing market still grappling with the effects of the Great Recession in the 2000s, private mortgage notes can be a millennial homebuyer’s secret weapon. Many banks aren’t approving Gen Y-ers for traditional mortgages because they don’t check all the boxes on newer, stricter mortgage qualifications.

Some common bank mortgage pre-approval qualifications a millennial may fail to meet are:

  • Good credit scores at 700 or higher
  • A consistent two-year job history
  • High down payment minimums nearing 20 percent
  • A passing home inspection

Private mortgage notes don’t come with all of these strings attached, however, making them an excellent way for a young buyer to purchase their first home.

Some advantages to purchasing a home with a private mortgage note are:

  • Faster home purchasing process
  • Fewer qualifications to meet
  • Buyers have more say in negotiating interest rates

The purchase of a home using private mortgage notes starts with your real estate agent—talk to them about this type of alternative mortgage and ask them to show you properties that offer private mortgages. When the time comes to put in an offer, he or she can also help you negotiate for a low interest rate.

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Taylor Griffith is an award-winning journalist with a background in newspaper, magazine and digital writing. She earned her degree from the University of Maryland's Philip Merrill College of Journalism. She regularly contributes to, along with other publications.

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