Private mortgage is short- term, most of time interest-only loans, ranging in length from 1 to 3 years. With a private mortgage, you borrow from a person, business or Mic (Mortgage investment corporation designed for mortgage lending in Canada), instead of bank or credit union. Whether it’s your only or one of many options, it’s worth learning how private mortgage lenders work. With Private Mortgage it’s important to keep in mind, typically the goal is to create a win-win solution where everybody gains financially without taking too much risk. Borrower gets the funds by using their property as collateral and investor gets the return on their investments. Private lenders want to collect their returns on investments within certain time frame and they want you to move on, once the term of the mortgage is over. Therefore a private lender will like to know, your exit strategy to move on to conventional mortgage, which is also in your best interest.
Why would you consider a private mortgage?
The main reason you may consider private mortgage is, you don’t qualify with the traditional lenders like banks, Credit Unions, Trust Companies. They need a lot of documentation and even if you are more than able to make the payments, they still want you to qualify according to their lending guidelines. You are also expected to have good credit history as well. On the other hand, private mortgage is based on equity in the property. Approval is not based on credit and/or income but your ability to make the payments. In case you have a bad credit but score is over 500 and also have stable steady verifiable income. Consider reading up-on bad credit mortgage.
You would use a private mortgage lender under any of the following circumstances:
- You want to purchase a property that traditional lenders won’t lend against.
- You need fast financing and don’t want to wait for a long approval process.
- You want to do some home improvements but banks will not lend you because there is not enough equity in the property.
- You have a bad credit or unverifiable income.
- You want to use your home equity to pay off high interest rate loans.
- You only need a short term loan.
- You are in a foreclosure or consumer proposal.
- You declared bankruptcy.
What criteria private mortgage lenders look at for approval?
Property Location and Value: This is the most important factor in being approved for the private mortgage. You will be asked for the appraisal of the property to make sure the market value and property is in good condition. Since private lenders don’t put much of weight on your credit and income for the mortgage approval, they make sure the property is in good condition.
Income: You can use confirmable income that can be proven by notice of assessment (NOA) or non-confirmable income like self-employed income or commissioned employee. Lenders want to look at it, to make sure you will be able to make the payments and is there an exist strategy for you, by qualifying for conventional lending.
Down payment: If you are buying a new house, you are going to need 15-20% down payment. The maximum loan to value the lenders will go is 85%. Private lender like if you have higher down payment, which means you have lot at stack by having more funds invested in property. It gives then assurance that you will not default on payments.
Equity: If you are refinancing, lenders will go to maximum of 85% loan to value. For example, if your property is value at $300K, you can refinance up to $255k.
Private Mortgage Rates and Fees
It depends if the mortgage is in first position or second position. First mortgage rates start from 5.99% and Second mortgage starts at 7.99% depending on the property, location, borrower and current economic conditions. When using a private lender, you (the borrower) pay the broker’s fee directly. Most of Private loans also have set-up fees bringing total fees paid between 1-5% of the loan amount.
The good news is, these fees can be financed through the mortgage loan. Let’s say you need to borrow $100,000, and can therefore expect fees of $4,000 ($100,000 * 4%). In order to cover these fees, you would apply for a loan of ~$104,000 to cover the extra costs.
Who are private mortgage lenders?
Private lenders are huge sector of the Canadian mortgage market where either individuals or group of individuals pool their money and offer 1 to 3 year, interest-only loans to people who don’t qualify for conventional mortgage. The investors prefer to invest their money in private mortgages because there investments are secured by property as collateral over investments in stocks, bonds, mutual funds etc.
What is the time frame can to get a private mortgage?
Approval usually takes place within 1-2 days. The processing of the loan and the release of funds takes around 1-2 weeks.
If your income cannot be verified and it is not consistent private mortgage may be a good option for you. If you are considering or would like to have more information about private mortgage specific to your situation, feel free to contact us for no obligation, free consultation.