Need an Alternative to the Banks?
Bank mortgages are usually reserved for people who fit a certain "cookie-cutter" lending criteria. Unfortunately that cookie-cutter often excludes people who are self-employed, people with equity in their homes but a bruised credit history, foreign investors, folks with taxes owing the CRA, or people in need of short-term financing that the banks aren't really interested in providing. Whatever your reason, if you don't qualify at a bank, you may qualify with a private lender for a private mortgage.
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Who are Private Lenders?
Every home is different, and so is every homebuyer; what may be ideal for one buyer may be problematic for another. The same applies to mortgages – because homebuyers are so diverse, there are a variety of mortgages available to suit people with different financial needs. While most mortgage loans come from banks, credit unions, and trust companies, there are some cases where turning to a private mortgage lender can be advantageous.
For example, if you’ve been turned down for a bank mortgage because of your credit history, but are still able to pay back a short term loan, you may be able to rebuild your credit history using a private loan. This type of solution is not for everyone, but for those in the right situation, private lending can make home buying a reality.
How Does Private Mortgage Lending Work?
While private mortgage loans and bank mortgage loans ultimately serve the same purpose of helping people become homeowners, there are several differences between the two types of financing: Private mortgage loans typically have much shorter terms than bank loans, and they also have higher interest rates. Private mortgages are useful for unique situations that institutional mortgage lenders aren't willing to lend in. When the bank says no, a private lender can step in to help to get the deal done. Whether purchasing a home or refinancing, a private lender can be useful when other options just aren't available. Often equity in the property is the easiest way to ensure you qualify for a private mortgage - even when income is difficult to prove and credit is poor.
Private lending isn't just for people with damaged credit or difficult-to-prove income - it's also useful when building a unique home or a home in an area that traditional lenders aren't willing to lend in.
What are Some Features of Private Mortgages?
Private mortgages are usually short-term - often terms of only a year or two. They often have higher interest rates than bank or credit union mortgages, and often carry a lender fee and a broker fee. These fees can often be paid up front or subtracted from the proceeds of the loan. Many private mortgage lenders require the borrower to pay their own legal and appraisal fees, as well as the legal fees of the lender.
Am I Eligible for Private Mortgage Lending?
Because the nature of the loan is different, the approval process for a private mortgage loan differs from the traditional bank loan approval process as well. While the borrower’s credit history is the most important eligibility factor for banks, private mortgage lenders also take into account other factors such as the value of the property and the borrower’s ultimate ability to pay back the loan. The approval process also tends to be quicker with private loans, which makes them a viable option for those who need quick financing and don’t mind paying a higher interest rate.
Who Can Benefit from Private Mortgage Lending?
The alternative approval process of private mortgage lending means that these loans can be useful for people like self-employed individuals and small business owners. Someone who is recently self-employed, for example, may not have a long enough income record to obtain a bank loan, but may still be comfortable paying off a mortgage. Other people who may be able to benefit from private lending include:
- People wishing to rebuild their credit history
- People in need of quick financing
- People who need a short term loan
- Borrowers who are purchasing unconventional properties
- Home buyers or home owners with self-employment income or other types of non-confirmable income
- Buyers who want to self-build a home
- Borrowers in need of interim (bridge) financing
- People who want to use the equity in their home to refinance and consolidate debt
How do Private Mortgage Lenders Approve Loans?
Private lenders are often evaluating mortgage applicants on a similar, but different set of criteria, than the banks. While banks look at four main criteria: Income, Credit History, Equity, and Property Marketability, private lenders are often dealing with applicants that are not as strong in at least one, or possibly two, of those categories. A borrower with unverifiable income, for example, may still qualify with a private lender if they have a good marketable home in mind and sufficient equity (usually at least 15% equity but up to 35% or more may be required). The same applies to a borrower with a verifiable income, but a poor credit history. In general if there is a good marketable property and sufficient equity you can usually qualify for a private mortgage.
Tips from First Foundation
Not sure if a private mortgage loan is right for you? Want to compare private lender options? Out professional, qualified mortgage brokers can help you navigate the complex world of mortgage lending and help you determine which type of loan is right for you.
If you decide to pursue private lending, we can help you find the best lender for your needs. Not all private lenders are created equal, and we can help you sort through the best private lenders Canada has to offer in order to ensure that you get the best private mortgage for your needs.
Give us a Call or complete the form below to talk to a broker about a private mortgage.