Private Financing

What is a Private Mortgage?

A private mortgage is an alternative source of financing given to a borrower by a private lender, and is usually sought after when a traditional bank or lending institution will not approve a borrower for a mortgage or a home refinance loan. They are usually short-term interest-only loans ranging from 6 months to 3 years. I will shop around to find you the best private lender who will offer you the right option for your needs and specific financial situation.

Private lenders understand that the guidelines used by the banks and other traditional lending institutions are very strict and in many cases banks turn borrowers away who are very capable of paying back their mortgages. Unlike banks, private lenders place a larger focus on the loan to value and over all condition of the property, instead of simply looking at the borrower’s credit and income.

A borrower will often try getting a mortgage or refinance their property by making contact with their broker first. If the banks turn them down due to bad credit, high debt that may be in arrears, low income, or other issues, then we would try and get you approved at an alternative lender also known as a B lender.

A B lender would charge higher rates than a traditional institutional lender, but the fixed rates will still be lower than in a mortgage from the private sector. Examples of B lenders include trust companies and certain credit unions. If the borrower has a severe problem with their credit and is declined by a B lender then we would turn to one of the many private mortgage lenders to shop for a short-term private mortgage.

A 1 year term is most common when it comes to a private mortgage. If this is a problem for you and a shorter or longer term might be a better choice, those types of private mortgages are available through certain mortgage lenders who lend using their own private funds. Terms start from 6 months for a private home loan and can be as long as 3 years for a private first mortgage, second, or third mortgage depending on the lender.

A private mortgage is an ideal short term solution for someone who almost qualifies at a B lender but might need some time to either build up their credit, save up a larger down payment, or grow their income and net worth. In this case, private is the way to go.

Unlike traditional lending institutions, private mortgage lenders lend primarily based on the value of the property, the equity remaining in the real estate, and they even take into consideration the city where the property is located in.

Why Turn To A Private Mortgage Lender?

There are many reasons why borrowers require the help or a private lender. Here are some of the most common reasons why we would set you up with a private mortgage :

• You need the money quickly and are not able to go through a very long approval process and risk not being approved.
• You have poor or bad credit and a bank or conventional lending institution won’t approve you.
• You have an untraditional way of declaring your income, or you are self employed and the bank is not considering all of your income.
• You are buying a non-traditional property that a conventional bank or institutional lender will not give a mortgage for.
• You only need a short term loan.

Types Of Private Mortgage Lenders

Here are the 3 most common types of private lenders:

Individual lenders

When an individual is investing their own personal money towards private lending, they are considered to be an individual lender.

Syndicate investors

When a group of investors invest their personal funds as a group into one mortgage, it is considers a syndicate mortgage.

Mortgage investment corporation (MIC)

When a group of investors pool together their personal funds and make them available to invest into several different mortgages at simultaneously, provided that the borrowers meet specific criteria to qualify for the loan, this is known and a Mortgage Investment Corp.

What Are The Different Payment Options For A Private Mortgage?

With most private mortgages, the borrower only needs to make the monthly interest payments instead of a blended monthly payment that includes both interest and principal. This helps keep the monthly payments lower and more affordable.

In some cases you can even choose to have no monthly payments at all by either pre-paying all of the interest when the loan is originally funded and having that amount deducted from the total loan amount.

You can also choose to defer all of the monthly interest payments until the very end of your loan term, this is called an accrued interest private mortgage.

A less common option is an amortized blended payment plan that allows you to to blend both interest and principle into the monthly payments, similar to a more traditional mortgage, so that you can build up additional equity in your home. With a blended amortized private mortgage you can have the payments calculated based on an amortization term for as long as 35 years in order to keep the monthly payments lower.

How Long Can I Get A Private Mortgage For?

Most private mortgages are short-term loans lasting as little as 1 month to as long as 3 years. This means that at the end of the term the full amount of the mortgage will be due, or you may have the option to renew the mortgage with the current lender. Repayment of a private mortgage is usually done by refinancing the entire private mortgage with a different lending partner.

Our goal is to help create a plan that will help you get out of your private mortgage as quickly as possible and into a more traditional mortgage at a much lower interest rate. We will even help you find the right lender as your private mortgage approaches the end of the term.

What Is the Mortgage Rate For A Private Mortgage?

Interest rates for a private mortgage depend on a variety of factors including the loan amount, the value of the property, the location of the property, and other factors. Private mortgage interest rates start as low as 5.99% to as high as 13% for a private first mortgage and as low as 6.99% to as high as 18% for a private second mortgage depending on the different factors that matter to the specific lender.

How Do I Calculate The Interest And My Payments For A Private Mortgage?

Here is a simple example that will illustrate how you can calculate what your interest payments will be on a private mortgage loan.

Let’s pretend that you are a homeowner and you need to borrow $300,000 to buy or refinance your property that is valued at $400,000 and the bank turned you down because you either have poor credit or are self-employed and have a non-traditional way of declaring your income. You came to see me and we shopped around for the best private mortgage rate and were able to get you approved for 8% on a private first mortgage for a 1-year term with interest only payments. To calculate how much your monthly payments would be, you would use the following simple formula:

Monthly Payment and Interest Calculation Formula:

Monthly Payment = Total Interest Amount for the Year ÷ Number of Months in the Mortgage Term

Step 1 : Calculate the total interest for the year
Total Interest Amount for the Year = Annual Interest Rate x Total Mortgage Amount
Total Interest Amount for the Year = 8% (monthly interest rate) x $300,000 (total mortgage amount)
Total Interest Amount for the Year = $24,000

Step 2 : Calculate the monthly payment amount
Monthly Payment = $24,000 ÷ Number of Months in the Mortgage Term
Monthly Payment = $24,000 ÷ 12 months
Monthly Payment = $2,000

These calculations show that at the end of the 1 year term you would have paid a total of $24,000 of interest by making 12 monthly payments of $2,000 a month. You would still owe the entire $300,000 in principal back to the lender and hopefully by the end of your term I will be able to help you either refinance at a better rate or renew. I typically recommend starting the renewal or refinancing process 3 to 4 months before the end of your mortgage term so that we have enough time to find a lender that will offer the best possible solution to you given your updated financial situation.

If you have a credit score that is below 580/600, you are likely not going to be approved by a prime lender like a bank, and even institutional bad credit lenders will likely deny you a mortgage. Luckily you can turn to private lenders who provide many different mortgage solutions for clients who have bruised credit, bad credit, and even horrible credit. I can help you find the best private lender for your specific financial situation that will provide you with the most competitive rate, though it will be higher than what you would get from a bank if you were to have a very strong credit history.

Calculating the Loan To Value (LTV) when applying for a private mortgage

You need to have at least 20% of a down payment or equity in the home to obtain a private mortgage, some lenders will require more. The loan to value is worked out by the amount of the mortgage you need divided by the purchase price or appraised value of the home if you are refinancing. Appraisal needs to be completed by an approved appraiser who will come to your house and take a few pictures of the inside and outside of the home and give it a value based on todays market.

Example: Purchase price of the house is $500,000 and you are looking for a $300,000 mortgage.
$300,000/ $500,000 = 60% Loan to Value

What Are The Fees Involved With Getting A Private Mortgage?

Banks and other institutional lenders pay Mortgage Brokers a commission on every mortgage that the brokerage gets funded from them. Private lenders however, do not pay the brokerage any commission and therefore that fee is passed along to you. Also, because private mortgages typically carry more risks to the lenders, private lenders will charge an additional lender fee to the borrower along with a small legal fee incurred by the lender. The borrower will also have to pay their own legal fees.

The total fees that you can expect, including the lender and broker fees, but excluding the legal fees can range from a little as 2% to as much as 10% of the total loan amount, depending on the size of the loan, the complexity of the deal, and the risk to the lender.

The good news is that in most cases, these fees are subtracted from the loan when it is funded to ensure that you do not go out of pocket to pay for these costs.

For example, if you are applying for a $100,000 private first or second mortgage and the lender and broker fee is 4% in total, plus the legal costs amount to $2,000, then your total closing costs on the mortgage would be $6,000. In order to cover these costs, you would simply apply for a mortgage of $106,000 instead of $100,000, so that all of the closing costs are paid directly by the loan rather than out of your pocket.

How Quickly Can I Get My Private Mortgage Loan?

An approval for a private mortgage can take less than a day in some cases and in certain situations you can have your money within a week if it’s a simpler deal. The average length of time that it takes to get approved and funded by a private lender is from a few days to up to 3 weeks on average.

The goal of a private mortgage lender is to have the borrower improve their situation over the term of the mortgage and be in a position to refinance the entire private mortgage to a prime or more traditional lending institution. Since these loans are short-term loans, and private lenders are not nearly as regulated as the banks are, private mortgage lenders are able to make much faster financing deals, but they also want to be able to collect their return on investment in a much shorter period of time.

What Do I Need To Be Able To Qualify For A Private Mortgage?

Qualifying for private mortgage loans in Canada is typically a much easier and quicker funding option than looking to qualify at a bank or other more conventional lenders.

Since traditional mortgage lenders such as banks and B lenders have to comply with strict regulations when analyzing applicants for mortgages and enforce the mortgage stress test imposed by the Canadian government, more and more borrowers are turning to mortgage brokers to gain access to lenders for private first mortgages or private second mortgages using the equity they have in their homes.

In a city like Vancouver and other growing parts of British Columbia and Canada where the possibility to buy a property has become nearly unaffordable for the average Canadian, a private first or private second mortgage is becoming more and more common. This is because for the most part, unlike many of the conventional mortgage lenders, lenders in the private mortgage market do not take a borrower’s credit history, current debt situation, payment arrears, and income into consider.

Even with bad credit and limited income I can get you a quick approval with most private lenders if you have enough of a down payment or equity in your home.

Private lenders will give a mortgage on deals that banks see as being too risky. Because of these risk factors, these lenders place an emphasis on different factors than the banks do.

How To Qualify For A Private Mortgage

Here are what most private lenders deem to be important factors when analyzing a potential borrower and the mortgage that they are requesting:

Property value and type of property being mortgaged: To most private lenders this is the single most important factor that a private lender considers when determining whether or not they should approve a borrower for a private mortgage. The property value, type, and condition all play a role in minimizing the risk to the lender, especially if the borrower has bad credit or poor credit, and helps ensure that the private lender will be able to recoup his investment.

In order to pass this test, the property should be in good condition and in most cases a third party appraisal is required by an accredited appraisal company.

Down payment and loan to value (LTV) for new purchases: In most cases private lenders will not give a mortgage on a property that has a loan-to-value that is higher than 75% to 80% which means that you will need to have at least 20% to 25% available to put as a down payment for the property. In fact, many private mortgage lenders will not go higher than 75% or 80% LTV. This of course depends on a variety of factors such as location, marketability and condition of the property, and more. I have seen some properties in poor condition where the private lender will only lend on 50% of the value of the property.

If you have the ability to invest a larger down payment then it is usually recommended that you do so to save on costly interest payments. A larger investment from your part also shows the lender that you are willing to have more “skin in the game” and therefore it makes the private lender feel more confident in granting you a private mortgage. The lower the risk to the lender, the lower the interest rate and fees become, therefore it is usually advisable to provide a larger down payment if you can afford it.

Equity available for refinancing or second mortgages: When refinancing your property or adding a second mortgage or third mortgage some private lenders will allow you to go as high as 80% loan-to-value in some cases. For example if your property is worth $500,000 and you wish to refinance $400,000 then you will be finance up to 80% loan-to-value (a private mortgage loan of $400,000 is 80% of the total value of the $500,000 property).

Income (ability to make the monthly payments): Unlike banks, private mortgage lenders are much more accepting of both conventional income and less conventional income such as self-employed workers or business owners, or commission based employees who report their earnings in non-traditional ways. Conventional income often times comes in the form of a regular annual salary or hourly wage and can be proven using the borrower’s Notice of Assessment (NOA), paystubs, and T4’s. Since non-traditional income is reported differently, it can be a little more difficult to show proof of income and the lenders need to accept certain estimates using a variety of information that banks tend to shy away from.

In addition to the technical points above, here is a list of a few additional behaviour tips that can help you get approved for a private mortgage:

• Ensure that the property is clean and uncluttered when an inspector or real estate appraiser visits the property will “show” better and please the lender to help maximize the value that we would use when your application is being reviewed for the private mortgage.
• Providing only the complete information that your mortgage broker is requesting in a timely manner can help to speed up the process in getting you approved for the mortgage.
• Be completely open and honest with you broker and with lenders. Do not bend the truth or hide any important information. Most lenders are experienced, and they will call out any discrepancies they notice. If lies are uncovered by lenders later in the application process, you will likely be turned down for a private mortgage.
• If you have any other properties disclose this to your broker and to lenders as they will likely appear on your credit report. You can use a second property in the form of cross-collateral to help lower your fixed interest rate or qualify for a higher loan amount from the mortgage.

What Are Some Pros and Cons Of A Private Mortgage?

Mortgages like this tend to be a last resort or a temporary financial solution in many circumstances. It is important to have all of the facts when making this kind of call. When it comes to consolidation of debt or when a person’s credit history, income or employment is an issue, this is in many circumstances the best choice for someone in that position to get a mortgage.

Here is a list of some of the main benefits and cons about getting a private mortgage:

Pros of A Private Mortgage:

• Debt consolidation: In the case of a debt consolidation mortgage, a private mortgage can be taken out using the equity that you have available in your home. This loan comes with a much lower interest rate than credit cards, student loans, overdue bills, and many other higher interest debts. One of the main benefits of consolidating all of your higher interest rate bad debts into one substantially lower monthly payment is the consolidation loan comes at a much lower interest rate. This way, you will be able to free up cashflow and pay down your debts faster if you allocate a portion of the newly available cashflow towards the principal of those debts. This can help prevent you from being in arrears on future payments and these loans are usually granted regardless of your credit score.
• Fast approvals and less hassle than a bank mortgage: Lenders who invest privately into mortgages in Canada are not required to follow the same kind of strict regulations that banks in Canada are mandated to enforce. This is why, for the most part, private mortgages are much easier to get approved for and require much less time and effort on the part of the borrower. A private mortgage loan is usually offered regardless of your credit rating or history and based more on the type of property. While it might take weeks to get a mortgage from the bank from when you first contact them, in many cases a private lender can approve and fund your mortgage in as little as 48 hours from the time that broker submits your application. This is great if the closing date of the sale and new purchase of a property is approaching and is often times the best option in these circumstances. Because they lend their own private money, they can do it much quicker than most other types of mortgage lenders.
• No minimum credit score requirements: Although a great credit score would please a private lender, many private mortgage lenders approve borrowers based on the value and marketability of their property. As a result, often times a private lender will have no minimum requirements when it comes to a borrower’s credit score.
• No minimum income requirements: Unlike banks, a private lender will place more emphasis on the property itself rather than the borrower’s income. Therefore, this can be the best mortgage solution to people who are self employed, in business for yourself, and those who have a non-conventional way of declaring their income. Even if you do not currently have full-time work, you can still qualify through the private channel.
• A private mortgage can help you rebuild and repair your credit: If you have a poor or less than a top rated credit history, a private mortgage can help you repair your credit provided that you keep up with your monthly obligations.

Cons Of A Private Mortgage:

• Higher interest rate: A private mortgage lender takes on a greater risk to their investment than banks or B lenders. This is one of the main reasons why they, the lender, would want to charge rates that are higher on a private mortgage than the rates on a more traditional bank mortgage.
• Broker and lender fees: Unlike banks, these lenders charge a separate fee that is deducted from the total mortgage loan amount to further help secure their investment. Also, while a bank would pay mortgage brokers directly for their service, a private lender does not. As a result, the brokerage would want to charge a brokerage service fee that is also deducted from the total mortgage amount advanced to the borrower upon closing. There may be additional fees in the event of a mortgage renewal.