Private Mortgages – Benefits, Advantages and reasons you should consider a private mortgage.
What are private mortgages? Why do we as mortgage brokers provide you an option to pick Private Mortgage Investing? Private Mortgage Investing or Private Money Lending refers to a private individual providing a loan to another with real estate as collateral. Private mortgages are generally short termed and are interest only loans that can range in length, anywhere between 1 year to 3 years. These kinds of ‘interest only loans’ do not usually require homeowners to pay any principal on their mortgage down, but instead require interest payments each month.
Many individuals who have the capacity to make their mortgage payments are denied a mortgage due to the strict and conservative lending guidelines used by banks and other conventional lenders. Private lenders see this as an opportunity to provide capital to these individuals as these lenders generally consider the overall value of the property and its marketability as opposed to just the borrowing individuals’ credit history. For individuals having trouble qualifying for a traditional mortgage, private mortgages could be a solution. Increasingly stricter mortgage regulations have made this type of borrowing highly popular among home buyers.
So why use a Private Mortgage Lender?
In most of these cases you would consider a private mortgage over a conventional mortgage from a bank:
- You have a bad credit history and get rejected on your mortgage applications from banks.
- You do not want to wait for the long approval process from banks and need a fast financing done.
- The property you want to purchase is unconventional and prime lenders and banks will not finance it.
- You are self-employed, and most of your income is unsteady or is not verifiable in the traditional sense.
- You are new to Canada and not yet a resident.
- Micro-condos, properties that are less than 600 Sq. ft which are often not financed or refinanced through a bank.
One of the key benefits of a private mortgage can be the need of less documentation and private lenders being more flexible in terms of credit history. With the added benefits provided by private mortgages, there also comes a higher interest rate. In addition to the interest only payments, private mortgages are typically higher paying mortgages due to the higher interest rates to compensate for the higher risk taken on by the lender. Depending on your mortgage position, marketability of your property and credit worthiness, the interest rate you would be looking at would be anywhere between 7% to 13%. Approvals for private mortgage loans, assuming all your paperwork required is in place, can occur within one week of the application and in some instances, depending on the lender can be done as soon as a couple of days. Further, the loan processing and release of funds can take anywhere between 2-3 weeks.
Since private lenders are more flexible on factors like credit history, they have tighter guidelines on other factors that compensate for the added risk that they take. Some of the criteria private lender investigate are:
- Your property type and value are one of the most important factors that lenders consider. The property you mortgage for must be in a good condition and will undergo a strict appraisal prior approval. If you happen to have a low credit score, your application is deemed to be riskier, and the lender would have to ensure security of their investment in case you default your mortgage.
- Down payment on your mortgage if you are purchasing. Private lenders look for a Loan to Value of a minimum 85%. This means that you would have to put down 15% as a down payment if you would expect your mortgage to be approved. A higher down payment is also preferred by lenders as it shows that you have more funds invested in the property and shows that you have more at stake.
- The Equity if you are refinancing your mortgage. Like purchase mortgages, private lenders allow 85% loan to value. For example, if the value of your property is $500,000, you can refinance up to $425,000. Most private lenders prefer a maximum LTV of around 75% especially in British Columbia.
It is important to understanding the factors and risks involved in getting a private mortgage. If you feel that your financial situation is unstable and can change soon or if you feel that your mortgage requirement is not short term, you should not consider a private mortgage.
While considering a private mortgage, consulting with a mortgage broker can be incredibly beneficial. Mortgage brokers weigh the benefits and the costs that you may incur in your venture and determine which type of mortgage, conventional or private, best suits you and your financial situation.