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What Is a Private Buyer?

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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 04 September 2016
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A private buyer is an investor that is not affiliated with a government agency or publicly sponsored entity. The term "private buyer" is most commonly used to describe individuals or financial companies that purchase residential or commercial mortgages. Investors use term to differentiate these investors from the government-sponsored enterprises that purchase large numbers of consumer loans.

To encourage lenders to finance residential and consumer loans, national or regional government agencies often agree to insure or purchase loans from banks and other financial companies. Typically, government sponsored enterprises only buy or insure loans that meet a certain criteria in terms of the loan amount and the borrower’s credit worthiness. Loans that do not meet government guidelines are often sold to private buyers since there are normally few limitations on the kinds of loans that financial institutions can sell to these investors.

Like a government-backed agency, a private buyer has to content with the risk that the borrower may default on the debt. If this occurs, the buyer may have the right to take legal action against the borrower but in many instances, private owners of defaulted loans end up with nothing. Given the risks involved, private buyers typically only buy loans on which borrowers are paying above average rates of interest. The borrower’s loan payments produce recurring monthly income for the private buyer.

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While some private buyers purchase loans directly from banks and other lenders, in many instances a private buyer has no direct contact with the original lender. Investment firms often purchase thousands of mortgages from banks and then package these loans into mutual funds. These firms and sell shares in the mutual funds to private buyers. Therefore, each buyer has an ownership stake in a large number of loans rather than total ownership of one particular loan.

Aside from loans involving major commercial lenders, many mortgages involve financing arrangements that have been agreed between private individuals. People who have poor credit scores often turn to friends, relatives or business acquaintances for loans. In some instances, these loan contracts include stipulations that enable the lender to sell the debt to another party. Unlike the loans issued by commercial banks, these privately issued mortgages are not sold on stock markets. Instead, a private buyer purchases the loan by reimbursing the lender for the balance owed and filing a change of ownership notice at the regional courthouse.

Whether a loan is purchased by a public or private entity, the borrower and the investor are bound by the terms of the lending agreement. This means a private buyer cannot demand full repayment of the loan prior to the loan maturity date unless the loan contract includes a stipulation that enables the lender to call in the loan. In most instances, strict laws exist that govern the way in which loans are bought and sold and borrowers are normally informed when the debt changes hands.

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