Understanding the Basics of Private Mortgages: How Do They Work?
When most people consider mortgage loans, they typically think of receiving such a loan from a major bank. However, this is certainly not the only type of lender. It is also possible to get a mortgage from a private lender. This is an individual who lends their own money or a private corporation (such as a mortgage investment corporation) that pools money from private investors to fund syndicated mortgages.
Private lenders are not federally or provincially regulated since they do not accept deposits from the public. Thus, when you get your mortgage through a private lender, it may be referred to as a private mortgage.
In most cases, private mortgages in Ontario typically come with higher interest rates, ranging from 6% to 18%, and higher fees than traditional mortgage lenders offer.
However, they are generally easier to qualify for than a traditional mortgage because private lenders are not usually as strict about doing background checks. Therefore, when prospective homebuyers are unable to secure a traditional mortgage, a private mortgage is usually one of the alternative options they consider.
When does it make sense to apply for a private mortgage?
Although the thought of paying higher interest rates over a shorter term may not seem ideal, there are a few different circumstances when it makes sense to get a private mortgage.
For instance, if you have a bad credit history that is preventing traditional loaners from approving you for a mortgage or that is preventing them from approving you for enough funds to purchase a property, then looking into a private mortgage makes sense.
A private mortgage is also worth considering if you need the money for a house quickly and do not have time to go through a traditional lender’s approval process, which can sometimes be lengthy.
Alternatively, it might be difficult to meet traditional lenders’ approval requirements if you are a newcomer because of your foreign credit history and short employment history within the country. Someone who is self-employed or has irregular income may face similar complications as well.
Private mortgages are also a popular option for purchasing an unconventional property, such as a fixer-upper, an inherited home, or a home in a rural area, for which traditional lenders may be hesitant to approve a mortgage.
How does a private mortgage typically work?
A private mortgage is mainly meant to be a short-term solution, so a private mortgage’s amortization period is typically between six months and three years. The idea is that if a homeowner makes all their mortgage payments on time during this term, they will be in a better position to apply for a mortgage from a traditional lender.
Although getting a private mortgage is considerably easier than qualifying for a traditional one through a bank, there is still a process that you must go through, and there are certain eligibility requirements that you must meet.
Private lenders may also have certain conditions, such as a set maximum loan-to-value limit. In an urban market, a mortgage for up to 85% of a home’s value may be possible, but in rural areas or specialty properties, the loan-to-value may be less. Aside from that, the main requirements that you typically need for a private mortgage approval include the following:
1. Proof of income
To be approved for a private mortgage, it is important to demonstrate that you will have enough income to make your mortgage payments. If you are self-employed, this could be a potential obstacle, but as long as you can provide some documentation to prove your income, it should be manageable.
2. A down payment
If you want to get a private mortgage, it is almost certain that you will need to pay a down payment. In most cases, this down payment must be at least 15% of the house’s purchase price.
3. A sellable property
A private lender will also generally consider the type and condition of the property you intend to purchase. This is because the lender will want to take possession of the property and sell it to recover their investment if you default on your mortgage payments.
Factors to Consider When Seeking a Private Lender
Since private lenders are not regulated, it is important to ensure that you are working with a reputable lender. Whereas some private lenders will force a foreclosure or a power-of-sale if you default on your payments, it would be better to find a lender that is more flexible and willing to work out arrangements under such circumstances.
Make sure that once you settle on a private lender, you read your contract carefully to be certain you fully understand the terms of your agreement.
If you notice a “bona fide sale clause” in your mortgage contract, this could be a major red flag. This means that selling the house is the only way for you to break your mortgage contract.
Of course, signing such a contract and agreeing to the terms could prove problematic for a number of reasons, so it would be better to avoid signing contracts that include this type of clause.
How Canadalend Can Help You Secure a Private Mortgage
If you are interested in obtaining a private mortgage in Ontario and want to work with a reputable private lender you can trust to keep your best interests in mind, Canadalend can help.
We network with a variety of private investors and lenders who can help you with private mortgage financing so that you can purchase a house no matter what your credit history is like and regardless of whether you are self-employed or earn foreign income.
To avoid the stress of dealing with a traditional bank’s mortgage approval process, our team of professionals will help you choose the best private mortgage option on the market.
Our goal is always to offer our clients top-quality service, which is why our lending specialists even provide free personal consultations. After getting a sense of your needs, we can help you find solutions quickly. When you find a private lender through us, you can trust that they will arrange a fair and transparent mortgage agreement that is in line with your requirements.
For more information about how we can help you find the perfect private mortgage lender or to schedule a free personal consultation with one of our lending specialists, call Canadalend at 1-844-586-0713 or contact us here.