A private mortgage note is very similar to a bank mortgage, except that it is funded by a private individual or entity, rather than a bank or a government agency, like Fannie Mae or Freddie Mac. Both private and bank notes are loans collateralized by real estate. Both have specific dollar amounts, repayment terms, closing costs,etc.
Unlike banks, however, private loans are not based upon a borrower’s fico score or debt to income ratios; rather, they are based upon the collateral – equity in one or several pieces of real estate. This “equity position” is the safety that protects the investor. Typically, the threshold is 60% loan to value, although on certain types of loans or properties, the ltv may go higher. Additionally, private loans are shorter than most institutional mortgages.
Should the private note go into default, the investor can initiate the foreclosure process, and can ultimately take back the property. And while Cushner Capital Group will always try to limit and mitigate this risk, there is always the chance that the property will go back to the lender.