All reports point to an abundance of millennials who are seeking to own their own homes. But the members of this sector often quickly find out that purchasing their first home isn’t always an easy proposition, especially with student-loan debt, outstanding credit card bills, and sometimes, a lack of credit altogether. All of these obstacles can combine to make it more difficult to secure mortgages from banks, but there is hope. Many millennials are finding that they are able to circumvent the rigorous mortgage-approval process by taking on a private mortgage note.

What is a private mortgage note?

A private mortgage note is an alternative to a traditional mortgage through which a private person or entity such as 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, 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 also can sell their notes to another person or company. 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.

No strings attached

Many banks aren’t approving millennials for traditional mortgages because they don’t meet all of the requirements on newer, stricter mortgage qualifications. Among the common bank mortgage pre-approval qualifications that 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; and
• 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.

Mortgage note advantages

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

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

The purchase of a home using private mortgage notes begins with a discussion with your real estate agent about this type of alternative mortgage and asking them to show you properties that offer private mortgages. When it’s time to put in an offer, your agent also can help you negotiate a lower interest rate.