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.