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.