When Are Private Mortgages a Good Option?

Feb 18, 2020

If getting a mortgage has turned out to be a difficult process for you, it may be time to start looking into alternative ways to get approved. 

The decision to go with a private mortgage has to make sense.  Here are some scenarios when it is a good solution and if one of the cases below fits your current mortgage situation then you should consider working with a private lender:

• You are trying to buy an unconventional or unique property that a bank or another lending institution is not ready to finance

• You are self-employed: you could be a business owner with lots of expense deductions and low reported taxable income. Or maybe you have been self-employed only a short time—fewer than the two years A-lenders prefer to see
• You have a lower than average income or a non-traditional income source and you find it’s affecting your ability to qualify

• You cannot pass the mortgage stress test: inability to meet maximum debt-service ratios

• You need quick financing without having to wait for long approval processes

• You need to access the equity in your home but the penalty to break your current mortgage is too high, and you don’t have enough income to qualify for a HELOC or second mortgage with a financial institution

• You have past credit challenges such as bankruptcy or consumer proposal

• You have a bad credit history or lower credit score and is restricting you from getting a mortgage from a more traditional lender

• You need to consolidate high-interest debt, but due to bad credit, you have been turned down for refinancing or you want to obtain a second or third mortgage to finance a renovation or for another purpose

• A divorce, illness or some other life-changing event has hurt your credit rating.  You need mortgage financing until you get back on your feet

• Your existing mortgage is in arrears, power of sale or foreclosure.  You need to take out equity from your property to get you back into good standing

• You want to purchase vacant land or a unique property that institutional lenders won’t touch because it’s outside of their lending criteria

• You’ve sold your existing property and bought a new property, but your purchase closes before the sale.  You need bridge financing, but your lender doesn’t offer it 

• You sold your existing property and bought a new property, but the sale of the existing property fell through.  A private mortgage can tide you over until the property is sold again

• You’re interested in buying a “flip” property or a home that is in major disrepair, and you need financing to fund your renovation

• You need a short-term loan for only a few years
• Your income debt ratio is significantly too high

• You require your payments terms to be more lenient

How Do Private Mortgages Work?

Feb 18, 2020

Lending private mortgage money simply refers to private individuals or groups loaning money to a borrower. The borrower might be looking for a mortgage to purchase a property, wanting to re-finance an existing mortgage, or needing to add a second (or third) mortgage “behind” the first (or second).

Like an institutional or A lender, the private mortgage lender-investor holds the borrower’s property as collateral for the loan and receives payments on the loan. The interest rate, fees, and terms are negotiated between the lender and the borrower, sometimes through an intermediary like a mortgage agent or broker.

Here’s how a typical alternative mortgage offer would work:

• Private mortgages are generally given out for much shorter periods than prime conventional mortgages. Typical terms range from 6 months to 3 years

• Interest rates offered are higher than those of prime conventional mortgages

• 30-year amortizations are normal, and in fact, a couple of private lenders will allow 40 years with a modest rate increase
• Interest-only mortgages – These loans are offered only by private lenders. Borrowers make monthly payments of interest with no payment of principal required until a specified date. Term of Interest only loan is usually 1 year.

• Additional loan processing fees over and above the interest payments can be expected

• Loan processing and funds release usually takes around 2-3 weeks, and approvals can come in as brief periods as a couple of days

• Higher debt service ratios than the A lenders – can go up to 48% or even 50% Total Debt Service Ratio

• Collect your property taxes with your mortgage payment

• Most of them charge a modest renewal fee, and some charge an annual maintenance or administration fee (a few hundred dollars)

Not everyone can qualify for bank mortgages today. With the mortgage rules constantly changing, private or alternative mortgages are becoming the only way some people can refinance or buy. 

When you are applying for a traditional mortgage (meaning you are a typical T4 employed client, good credit and significant down payment) the client is qualified based on the person first, then the property.

When you apply for private financing, the property is qualified for the mortgage first and then a few details about the client.