Are you a good fit for private mortgage products?

As the housing market continues to cool down, it is providing more opportunities for buyers to enter the market. Lower housing prices are creating greater chances for new buyers who may have been pushed out of the market during the peak of housing market mania from 2020-2022. With the potential for more buyers comes a potential increase in demand for private mortgage products. What exactly are these products, and how do they differ from a traditional mortgage lender? Here are the big points to know.

What are private mortgage products?

It might be easiest to start by explaining what private mortgage products are not. Conventional mortgages are funded by traditional lenders, like a bank or credit union. They focus on an applicant’s credit, capacity, collateral, character, and capital, also known as the 5 Cs. They can be very strict with their lending rules. Private mortgages are not quite like that. Rather than coming from a bank, private mortgages are funded by individuals or a Mortgage Investment Corporation (MIC), where investors combine money to privately invest in mortgages. They are more flexible than conventional mortgages, with a less rigid focus on the 5 Cs. This means they are easier to secure for certain individuals.

Who is most likely to need these products?

Self-employed workers

Self employment is on the rise in Canada, as more and more residents are deciding to take businesses into their own hands. Despite this, and despite the fact that many self-employed workers make a respectable living, mortgage financing is still very tricky for these individuals. The issue is that without a standard employment contract, salary, and T4s, lenders don’t have the same reassurance about a self-employed person’s income. The fear is a self-employed borrower won’t have a reliable or steady income to always make their mortgage payments, and there’s no easy way of determining how much money a self-employed person makes. Since traditional lenders can be very picky about their clients, many self-employed workers turn to pirate mortgage products. Private lenders are often more willing to finance a mortgage for the self-employed.

People with lower credit or debt issues

The next group of people who benefit most from private mortgage products are those whose credit score isn’t quite where they’d like it to be. Whether it’s due to problems with debt, a payment history dotted with late or missed payments, or perhaps just a low credit utilization, conventional lenders won’t provide a ton of flexibility with credit scores. Every lender has their own range of acceptable credit scores, but they usually fall within the 650+ range. This means people with scores below that number may face some challenges. Private lenders are, once again, often more accommodating to borrowers with scores on the lower end of the spectrum. Sometimes, debt is unavoidable, perhaps due to student loans or a new car you’re paying off. The good news is private lenders may be able to finance a mortgage for you while you’re working on those debts, perhaps more easily than traditional lenders.

Borrowers looking to purchase a fixer-upper

When lenders finance a mortgage, they require a borrower to provide them with an appraisal. This is the value of the property. Lenders won’t finance a mortgage for more than the appraised value of the home, but this becomes an issue when someone wants to purchase a fixer-upper. Fixer-uppers obviously won’t have a very high value at the time of purchase, so how can buyers secure the financing they need to purchase and improve this kind of property? Some private lenders offer Purchase Plus Improvements programs, which means they provide the financing for buyers to borrow the money required to fix the home as well as buy it.

Buyers in need of bridge financing

Finally, we have bridge financing, a very common need amongst buyers. Most people who sell their current home want to use the money from that sale to support the purchase of their new home. However, often closing dates don’t line up perfectly, meaning you could take possession of the new home before the official closing on your old home, where the equity is still tied up. That obviously means you can’t access that equity yet to support the new property’s purchase. Private lenders often provide bridge financing, which is funding to cover the gap between those times. You’ll be able to use that borrowed equity even before your home closes, and you will repay it once you have completed the sale of your property.

Things to keep in mind with private mortgage products

You can expect a faster timeline

Due to a private lender’s increased flexibility, you can expect a quicker turnaround time for your mortgage application. Borrowers don’t have as many hoops to jump through with private mortgage products, so things like the extensive credit and income checks aren’t as intense. Fewer restrictions means fewer obstacles and a speedier approval journey. Often, borrowers can be approved within two to five days, which provides a big sense of relief and cuts out unnecessary anticipation.

Flexibility comes at a cost

A very important point to note about private mortgage products is the flexibility you enjoy comes at a cost, meaning higher interest rates. These lenders are taking on a riskier borrower, so they come with much higher rates than traditional lenders to ensure they will not lose money. People with debt issues, lower credit, or a less steady income might not offer the same reassurance to a private lender, which is why rates of 14 per cent are pretty common. Plus, borrowers must provide a bigger down payment than they would with a traditional lender. With private lenders, down payments of 20 per cent and up are fairly standard. This is also to make up for the potential risk lenders are taking on.

Private mortgage products are certainly a growing part of the mortgage industry. The tricky part can be knowing if they are a good match for you. We can help you evaluate your situation to see what the best options are for your mortgage needs.

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.