What do private Lenders take into account?
Well in most cases, a private lender would consider the overall value of your property and how marketable it is. They are less likely to have a look at your credit history
How do Private Loans Differ from Conventional Mortgage Loans?
Most homeowners consider private mortgage loans as an option if they cannot find secure financing from any other source. Private lenders get their money through other individual investors or MIC i.e. Mortgage Investment Corporation. In both cases, a private mortgage is treated as a short-term investment.
There is a slight difference in the application process as well. Unlike bank mortgages which scrutinize your credit history
and financial situation, the private lender is interested in your property. This simply means that if a default occurs, the lender would fall back on your property.
It’s not surprising that properties in rural areas or less popular towns do not qualify for a higher loan amount. The private lender only pays attention to the condition of your property, its location and most importantly, how easy it will be to sell the property if you get into trouble.
Should I Consider a Private Mortgage Lender?
You can use a private mortgage loan instead of a conventional loan if:
- You want to buy an unconventional property that normally wouldn’t get financed by a bank or a financial institution.
- You need a quick loan and you cannot wait for the long approval process
- You have a bad credit history and the chances of your loan getting approved by conventional lenders are rare
- You only require a short term mortgage
- Your personal income is unpredictable and it would be difficult for you to find a conventional mortgage
Private Mortgage Loans – What Can You Expect?
The interest rate offered by private lenders depends on their source of funding. If your lender is funded by MIC, they would definitely charge you more to ensure a healthy rate of return for their investors.
Presently mortgage interest rates
are decided after evaluating your property, your financial conditions and of course, the prevailing economic conditions. Since most people turn to private lenders when they need quick loans or they cannot qualify for a traditional loan, you can expect to pay a higher interest rate for private loans.
For example, if conventional mortgage loans have an interest rate of 10 to 18%, you can expect a private mortgage lender to charge you slightly more than this rate.
- You also need to remember that private mortgage loans come with a setup fee and this can range from 1 to 3% of the total loan amount.
- For example, if you borrowed $100,000 from a private lender, you can expect to pay $3,000 as a setup fee.
What are the Uses of Private Mortgage Loans?
You can use a private mortgage to buy a new property
Another popular use of private mortgage loan is for the second mortgage. You can use private loans as the second mortgage to support your conventional mortgage. Many people find this useful as most banks are hesitant to offer second mortgages.
A number of real estate investors are also turning toward private lenders for a variety of reasons. Some real estate investors use private mortgage for short term financing. This is especially true if they’re the ‘fix’ and ‘flip’ kind of investors.
are the best possible option if you want to buy a distressed property, such as homes that are due for foreclosure. Because conventional companies prefer not to touch distressed properties or finance them, a private lender can be your best bet. You can use private funds to buy the property and fix it. Once you feel that the property can generate excellent cash flow, you can put it up in the market and make more money.
Another use of private mortgage loan is to make the necessary aesthetic repairs and make your property more desirable. For example, if you are thinking about renting your home, you can make some timely repairs and even complete renovations
to make your home more aesthetically pleasing. Needless to say, it becomes really easy to charge higher rents when your property is in excellent condition.
Sometimes homeowners are turned away by banks because they have too many homes in their portfolio. If you feel that the bank won’t approve your loan or your application will get rejected, you can turn to private lenders and get the desired amount of money.
To be frank, private mortgages are the last alternative for most people. Despite this fact, signs show that more Canadians are scrambling for these types of mortgages, at least as a short-term solution. According to mortgage brokers, the recent interest is mainly coming from the self-employed who are looking for means to finance their properties. What has informed this recent surge?
This explains the popularity
For obvious reasons, mainstream lenders in Canada are wary of the following people.
- Those who need bridge financing;
- Those with poor credit;
- Investors in high-risk properties.
Because A-lenders have tight lending guidelines, B-lenders
have become the best alternative for these “risky” borrowers.
A more interesting dynamic in the increased affinity to private lenders is the housing boom in Canada. The Teranet-National Bank estimates that buyers are paying as much as 36 percent higher for a house as compared to six years ago. Unfortunately, conventional lenders have become more conservative over the same period.
What are the benefits of using private lenders?
One of the appealing things about private mortgages in Canada is the ease of qualification. Unlike traditional mortgages
, private mortgages do not concentrate on debt ratio and credit ratio. As long as you can prove that your project will be churning out profit within a couple of months, your credit is a non-issue.
Getting a private mortgage approved in Canada is amazingly fast. Once your property qualifies for the loan, you can expect to get the funds within weeks or even days.
I know you are expecting this! Yes, private mortgages can have a negative side.
The Downside to Private Mortgages
Unfortunately, this segment of the market is poorly regulated; there are no clear guidelines. This means that the lender can charge extremely high interest rates. If say the normal interest rate is between 7% and 12%, you can expect a rate of up to 25% for private mortgage. This is a huge financial load for the borrower.
One of the concerns of private mortgages is the tendency of private lenders to have conflicting terms and conditions. For example, they seem to be barely concerned about your financial history, but wait until you default the loan! To save yourself of worry, check ourt mortgage payment calculator.
The government has tried to address the concerns by assessing the market. Probably, once market level statistics are available, the uncertainty and high interest rates beleaguering this industry will finally be solved.
Should you apply for a private mortgage?
If you are self-employed or just going through a rough financial situation, banks or traditional lenders in Canada may not be ready to offer you a mortgage. This is the point where private mortgages come in. Suddenly, closing that lucrative real estate deal and avoiding the bureaucracies associated with traditional mortgages will become a reality. If you find a private mortgage is your best option, discuss the best steps with a reliable and experienced mortgage broker.
What Should You Consider Before Applying for Private Mortgage Loans
Even though private mortgage loans can help you get out of sticky situation, they are still a short-term fix. That’s right. You can consider getting a private loan as a temporary relief until your traditional loan application gets approved.
As stated earlier, private loans do have an additional cost associated with them. You need to remember that private lenders can charge you a higher interest rate. The interest rate you are required to pay depends on the condition of your property, its location and the amount of loan that is needed. It is seen that most private lenders charge 12 to 15% interest.
In addition to the interest, you are also required to pay a small setup fee to the lender which can be 1 to 3% of the loan amount. Another important thing to remember is that this fee can go up to 5% if the loan amount is less than 50,000 dollars. Other costs that can be applied include:
- Mortgage broker fee
- Legal fee
There can be additional charges for backing out of the private mortgage early. Make sure you ask your lender to know more about the associated costs before taking a private loan.
Private mortgage loans are granted by private lenders unlike banks or conventional financial institutions. These short term loans do not require homeowners to pay the mortgage principal. Simply put, you only have to make the interest payments each month. Because private mortgage loans are short-term, their time period can range from 1 to 3 years.
What do private Lenders take into account? Well in most cases, a private lender would consider the overall value of your property and how marketable it is. They are less likely to have a look at your credit history.