Our guide covers everything you need to know about investing in private mortgages, from identifying quality loans to investing without funding the full amount.
Private mortgages are short-term, secured loans offered by private lenders to borrowers, typically real estate investors, seeking to purchase real estate investment properties.
Investors choose private mortgages (fractional shares of mortgages) for three key reasons:
Historically, investing in private mortgages required significant capital and expertise in underwriting and loan servicing, limiting access for most investors.
To make private mortgage investing more accessible, lenders like Constitution Lending allow investors to purchase fractions of the loans they originate. This way, investors don’t need hundreds of thousands of dollars — the minimum investment is just $1,000.
Additionally, investors don’t need to handle loan origination, underwriting, or servicing. The lender manages those tasks.
This guide explores the benefits of fractional investing in private mortgages in greater detail. We also highlight key factors to consider when evaluating private mortgages and the lenders originating them, ensuring their quality.
Who are we? Constitution Lending is a private lender that has originated over $200 million in loans since 2018. Investors can purchase fractions of the loans we originate, starting at just $1,000. Due to the quality of our loans, 97% of investors reinvest with us after their first year. You can explore our options by signing up for an investor’s account.
Interest rates on private mortgages range from 10% to 14%, significantly higher than traditional mortgages issued by large banks.
Borrowers often accept these higher interest rates because private lenders can close quickly — usually within 7 to 14 days — while traditional lenders like banks may take 75+ days. This fast closing enables borrowers to capitalize on good deals and match the speed of cash buyers.
As a private mortgage investor, you earn interest over the 6 to 18-month loan term, providing higher yields than traditional stocks and bonds.
Read more: Investing in Real Estate Notes: The Ultimate Guide for Investors
Private mortgages are safer than most alternative investments because they are backed by physical real estate. If borrowers fail to meet repayment terms, investors can foreclose on the property and reclaim their investment.
That said, borrower defaults are rare. The default rate on private mortgages is around 4%, and private money lenders who exclusively originate high-quality mortgages, like Constitution Lending, typically see even lower default rates, around 2%.
As noted earlier, the conventional approach to private mortgage investing requires substantial capital, as you’re financing the entire mortgage amount.
Many private mortgage funds attempt to make investing more accessible by allowing multiple investors to pool smaller amounts of money, but these funds typically have minimum investments of $50K.
With fractional investing through a private lender like Constitution Lending, you can start with as little as $1,000. This is made possible by providing investors with direct access to individual mortgages, eliminating the complexities and overhead associated with large funds.
Here are six ways to differentiate between high-quality and low-quality private mortgages:
LTV (Loan-to-Value) is a ratio calculated by dividing the loan amount by the property’s market value. For instance, a $350K loan on a $500K property has an LTV of 70%.
LTV and after-repair LTV are critical factors when evaluating private mortgages, as they indicate how safe a loan is.
We advise that you only invest in private mortgages with an LTV below 70%.
This provides a 30% safety margin — the property’s value can drop by up to 30% (a rare occurrence in U.S. real estate markets), and investors can still recover their full principal by selling the property for 70% of its initial value.
In contrast, with a 95% LTV mortgage, a mere 5% fluctuation in property value could lead to a loss of principal for investors.
At Constitution Lending, every private mortgage we originate has an LTV below 70%. This protects our investors against worst-case scenarios.
Many investors mistakenly invest through brokerage platforms or mortgage managers.
The issue with this approach is that mortgage brokers and managers don’t invest their own capital in the loans they recommend. They simply connect investors with private mortgage sellers. While they may manage the loan, they lack "skin in the game" as their financial success isn’t tied to the loan’s performance.
Since they aren’t invested alongside you, they have little incentive to sell high-quality loans. Anyone can list hard money loans for sale on brokerage platforms with minimal quality checks, and most mortgage managers will work with any seller, regardless of the loan’s quality. This is a common reason why private investors end up buying bad loans.
Instead, partner with a mortgage lending institution like Constitution Lending that originates loans with its own capital and retains a majority stake throughout the loan term. By investing alongside you, we ensure our financial success aligns with the performance of the loans you invest in, guaranteeing higher-quality loans.
Read more: How to Buy Mortgage Notes with as Little as $1,000
A concern many private investors have is what happens if the borrower doesn't repay the loan. Will interest payments stop until the borrower starts paying again, or will the mortgage lender reimburse investors out of pocket?
To mitigate this risk, you should exclusively invest with private lending companies that provide investors with some sort of payment guarantee. This ensures you receive reliable cash flow for the entirety of the loan term, even if the borrower misses payments.
Constitution Lending offers a payment guarantee feature that covers up to six months of interest payments if the borrower defaults. You'll continue to receive cash flow, even if we aren’t.
During these six months, we handle the foreclosure process and property sale, recovering your principal investment and expected returns. We are the only mortgage lender offering this level of protection to investors.
Another key due diligence strategy is to review a private lending company’s default rate — the percentage of loans where borrowers stop paying.
As mentioned earlier, because Constitution Lending exclusively originates low-LTV, high-quality loans, we maintain a default rate of just 2% — half the nationwide average of 4%. This significantly reduces the likelihood of defaults for our investors.
A private mortgage’s interest rate determines your expected annual returns.
Most private mortgages have interest rates between 10% and 14%, with borrowers making monthly interest payments until the loan term ends.
A first lien mortgage is the primary lien on the property, meaning it gets priority over all the other mortgages in the event of default. If the borrower defaults and the property is foreclosed on and sold, private investors in the first mortgage are paid first.
Investors in the second mortgage only receive payment after all investors in the first mortgage are paid in full.
All Constitution Lending private mortgages are first-lien — you get paid before investors in the second mortgage.
With Constitution Lending, you can invest in private mortgages in under five minutes and with just $1,000. Here’s what the process looks like:
Note: You can also use our interface to contact our team with any questions.
Here’s what clients are saying about our investment options:
Sign up for a Constitution Lending investor account to begin investing in private mortgages.
Private mortgages offer attractive returns, typically between 10% and 14%, which is higher than the stock market. Additionally, they are a relatively safe investment as they are secured by physical real estate. If borrowers default, investors can take control of the property and sell it to recover their investment.
The best way to invest in private mortgages is to partner with a lender that offers mortgage investment opportunities and allows fractional investing in the loans they originate.
This approach provides two benefits:
The main benefit of investing in private mortgages is their high yields, averaging 10% to 14%. However, the key risk is that if the property’s value drops below the loan amount, investors may face a loss of principal. This is why it’s important to invest in low LTV loans, preferably with an LTV below 70%.
Related reads:
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |