Each private lender has their guidelines and comfort zones on how much they are willing to lend out based on the Property Type, Property Location, Down Payment/ Existing Equity, and the Applicant(s) ability to repay from an income standpoint. Applicant(s) credit holds little weight, but it is considered.
Typical private lenders guidelines are:
Property Type, Value and Location – When you apply for private financing, the property is qualified for the mortgage first and then just a few details about the client.
The property is the most important factor in being approved by a private lender. The property and location are what the lender is lending on. The mortgaged property must be in good condition and will have to undergo a strict appraisal before you are approved. If you have a poor credit score, you are considered a riskier client and lenders need to ensure that their investment is secure, in case you default on your mortgage.
Depending on the private mortgage lender, property location may be of significant importance. Some lenders specialize in rural and agriculturally zoned properties, land development, construction financing and blanket mortgages (a mortgage covering more than one property), while some lenders focus on major city areas with populations of 50,000.
When the risk is lower, a better rate can be obtained as well as a higher loan amount. For example in Toronto and GTA areas lending maximums are set at 80% of property value, while rural areas maximums may be set at 70 or 65%. Generally, this applies to both purchases and refinancing.
Each private lender has its own financing guidelines so do not expect all properties to be financed.
Equity or LTV % – With a private mortgage lender, the minimum loan-to-value ratio on the property is 85% regardless if you are purchasing or refinancing. That is, you need to have at least 15% of the equity in the property.
If purchasing, if you can afford to put in a higher down payment, it is advisable to do so, but at least you should put in a down payment of 15% to be approved.
A higher LTV % will drive a higher interest rate.
Credit – While it is very difficult to qualify for a mortgage with traditional lenders if your credit report shows credit impediments, or if you do not have credit at all, private lenders will consider your mortgage application regardless of your credit history.
Credit impediments can be recently discharged bankruptcies, paid or unpaid consumer proposals, collections, missed payments, judgement, written off debts, and consumer debt arrears.
Each private lender has its own requirements on the minimum credit score in order to consider approval. However, borrowers with lower credit scores possess more risks to lenders and thus the cost of the borrowing may be higher as well as the amount of approved loan.
Income – Your income determines how much you can borrow instead of whether or not you can borrow. There are many types of income that can be used to qualify you for a mortgage, but all income isn’t created equal. Although everything ends up as cash in your bank account, some types of income are stronger than others in terms of consistency and how easily it can be verified.
In general, your income can fall into one of two categories: confirmable and non-confirmable income. Confirmable income is preferred by lenders and is proven through Notice of Assessments (NOAs). Non-confirmable income, common among self-employed or commission-based employees, forces lenders to use an estimate of your income based on the average income typical of your employment.
Borrowers with non-confirmable income may have higher interest rates because they pose higher risks to the lender.
For the longest time, the majority of people considered private mortgages to be the last resort option, this is no longer the case. Choosing a private mortgage, even if you’re able to get one from an institutional lender, might be the best decision for your future. Private mortgages are for anyone and everyone, especially those who want a personalized experience and easy to understand process.
There are many differences between private lenders and traditional lenders; depending on your situation, one of these differences may be exactly what you need to make the best choice for you. Private lenders are not as strict as banks and large financial institutions because they are often private individuals lending their own money or a small group of investors who make their own restrictions regarding whom to lend money to and more. As private lenders are not obliged to follow the same rules as banks, they are able to make riskier loans and lend to people who can’t qualify for loans with banks under the stricter mortgage regulations.
Some of the advantages of Private Mortgages over bank mortgages are:
Easy to Obtain – When you work with a private money lender, you really only have to provide information that demonstrates that you’ve found a good investment that will pay off. Employment documentation and credit history are not as critical as long as you can prove that you have the financial resources to make the necessary loan payments. Plus, You may receive responses, approval and commitments on the same day.
Flexible Loan Terms – Private mortgage lenders are much more flexible than traditional banks when it comes to loan terms and is able to tailor loans to your specific needs.
Geared Toward Investors – Private money lenders understand that you’re purchasing, refinancing, and/or rehabbing a property based on its after-repair value, not its current value. More often than not, they lend you all of the money you need to achieve your goals with your investment than you would get with a traditional loan.
Get Fund Quickly – The so-called “approval” process is much shorter with private money lenders than it is with banks and mortgage lenders and even some hard money lenders. Given that there is virtually no paperwork to review, private mortgages can be closed quickly. Approval usually takes place within 1 week of application and can be as soon as a couple of days. The processing of the loan and the release of funding takes around 2-3 weeks.
If you’ve landed a deal and have a property under contract, it’s possible to get it funded within days instead of weeks or months.
Open to Challenging Property Types – Private mortgage lenders will often consider properties that many bank lenders would otherwise not finance. These types of properties include:
- Commercial Properties
- Vacant Land
- Rural Properties/Farms
- Unconventional properties like churches, gas stations
There are many other reasons someone would choose private mortgage lending over more traditional forms of credit. Maybe you have a poor credit history or no credit history at all. You could also be self-employed or retired. Some people have high-risk properties that can discourage traditional lenders, and others will need a private loan to bridge the gap between what they have and what they need to move into a new home. Or, if you need to take out a second mortgage to pay off bills, a private mortgage may be right for you.
With banks and large financial institutions having more restrictions these days, it can be very difficult for most property owners to secure a mortgage loan; thus, the increasing popularity of borrowing from private mortgage lenders. Although private mortgage lenders charge a higher interest rate than a bank it can’t be denied that borrowing from them is particularly alluring for those with bad credit or don’t have the luxury of time waiting for bank approval. If used correctly, funds from a private mortgage loan can save lives and also save homes in the process. It can buy enough time to allow someone to repair his or her credit score, pay off some debts, or renovate a home so that it can be sold for higher market value and avoid financial ruin.
Whatever your financial situation and as unique as it may be, if you have equity in your property, a private mortgage could be the alternative you have been looking for.
The private mortgages should be only a short term solution, but if it fills the gap and if done right, it could bring long term gains!