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Getting a mortgage comes with a lot of decisions and responsibilities. While we would all like to think we can qualify for the best mortgage product and rate with no problem, the truth is, it’s often much more complicated than that. Lenders are picky about financing mortgages, and sometimes you find you don’t quite meet their criteria. This is where a private mortgage comes in. These lenders provide a different path for buyers to help them secure a mortgage and purchase a home. Here are the big details to know.
What is a private mortgage?
First, how is a private mortgage different from a traditional mortgage? A big part of this difference is how lenders look at your 5 Cs of credit: Capacity, credit, character, capital, and collateral. Traditional lenders are quite picky with these factors, and require borrowers to be in good standing in terms of income, credit and debt history, employment, etc. A private mortgage caters to people who might not meet these stringent criteria. They provide mortgages to borrowers who perhaps have some debt history, or maybe their employment is not easily documented, for example. Basically, private mortgages help out those who cannot qualify for a traditional mortgage.
When should you consider private lending?
It can be tricky to know when exactly a private mortgage might be right for you. In fact, there are multiple scenarios where a private mortgage is a better fit than a traditional mortgage. Here are some of the most common situations.
Debt and credit issues
Many Canadians have problems with debt, or have credit scores on the lower end. There’s no shame in this, as inflation has caused the price of everything to skyrocket, limiting affordability and making it hard to make payments. Unfortunately, this doesn’t sit well with lenders, who are unlikely to finance a mortgage if a borrower has lots of debt or a credit score under 650. Their fear is the borrower will not be able to make payments on something as big as a mortgage. Private mortgages often accommodate people in this situation. These lenders will usually finance up to 80 per cent of the property’s value.
Self-employed individuals, while often making a great living for themselves, will struggle to get approved for a traditional mortgage. If lenders aren’t able to see standard proofs of income through T4s, for example, they have less assurance about the stability of your cash flow. While private lenders will also need to see documentation, they are more lenient in terms of the proof of income you can offer, and are willing to take on the perceived risk of a self-employed borrower with no fixed income.
Bridge financing is something many borrowers will require at some point. If you are selling one home and purchasing another, odds are, the closing dates will not line up perfectly. The thing is, most people want to use the sale of their existing home to finance the purchase of their new home. How can they do so if they must close on their new home before their old one is sold? This is where private lending comes in, once again. The lender provides a loan to bridge the gap between the closing dates of the properties. When your home sells, you will then have the money to repay the loan.
Purchase of a fixer-upper
Finally, we arrive at the issue of buying a house in need of serious repairs, also known as fixer-uppers. Traditional lenders will not finance a home for more than the property is worth. But to make a fixer-upper liveable, you will certainly need more money than the value of the property in its current condition. Private lenders are more open to these types of projects, helping to fund repairs on a home. Buying this property type results in a lot of extra spending, which private lenders are more willing to accommodate.
Benefits of private mortgages
Private mortgages have two big advantages over traditional mortgages. First, they are usually much quicker to qualify for. The application process, and getting qualified, has a fast turnaround time, often as little as two to five days. This makes the whole process shorter, and it doesn’t keep borrowers in the dark on their mortgage status. Since private lenders have fewer restrictions, it’s easier to be speedy with applications. The second big benefit is the flexibility and relative ease of securing a private mortgage. Private lenders are largely designed for people who don’t fit into the boxes traditional lenders require, meaning they were created to be more flexible and lenient. This is not to say you don’t need any kind of income or credit, but you will often find that what isn’t good enough for a traditional mortgage is acceptable for a private lender.
Drawbacks of private mortgages
It’s not always going to be easy! There are certainly some disadvantages of a private mortgage. The biggest con is the high interest rates private lenders charge. In exchange for their flexibility, these lenders require more assurance you are worth the risk, which comes in the form of high rates. Depending on the borrower, interest rates of 14 per cent are common. Second, private lenders require at least a 20 per cent down payment, and it can be much higher too. This is way above the five to 20 per cent traditional lenders need. Similar to the reason behind high rates, a bigger down payment acts as reassurance for the lender. Both of these drawbacks can be big hurdles to clear, especially if the reason you require a private mortgage is due to debt or income struggles.
There’s a lot more to know about private mortgages, and this only skims the surface of what borrowers should be considering. We recommend exploring our private mortgage page, where we have some more information on this service and how we can help you. If you think a private mortgage is the right path for you, we would love to get you started!
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.