The real estate world is a fast-moving industry where the buyer’s decisions must be made quickly. Sometimes an unexpected house comes up on the market before you have time to get pre-approved for a mortgage through a traditional lender or have time to figure out your finances if your credit score isn’t exactly where it needs to be. When this happens you should know that there are ways to secure a mortgage without going through the tight restrictions and rules that apply when you sign on for a mortgage through a bank. Instead of wasting time saving every penny you can for a larger downpayment or taking the time to improve your credit score, you can bypass the wait and get approved for a mortgage more quickly when you opt for a private mortgage.
Now the term “private mortgage” may sound secretive and scary. But, done correctly, it can make sense for a select few. A private mortgage does not always mean that you can’t afford a traditional mortgage, it’s more likely that your financial situation is just a bit more complicated. For example, as a self-employed business owner who doesn’t show all of their income on their balance sheet for one reason or another, a private mortgage with a higher than average interest rate could make a lot of sense.
First off, what is a private mortgage?
A private mortgage is an alternative source of finances through a private lender, such as friends, family, or a business, rather than a traditional mortgage lender like a bank. Access to a private mortgage lender comes in handy for people who struggle to get approved for a mortgage the traditional way due to poor credit ratings, financial history, or even those who have newly immigrated to the country not having a credit history at all. A private mortgage is normally a short-term, interest-only loan for about 6 months to 3 years, and the interest rates tend to be higher because there is more risk involved for the lender. Without the typical credit score, financial history, etc. the lender is really taking a chance on whether or not you can pay them back on time, and in full.
The pros of a private mortgage and when it may be a good option for you:
Private mortgage lenders follow Canadian real estate laws, but they are much less regulated. This means that they can adjust each mortgage contract to the lender’s needs a lot easier than a traditional bank could. This also means that you can typically get funds quickly with a fast processing time and flexible terms. But, when is a private mortgage a good idea versus a traditional mortgage?
If you have a poor financial history:
A private mortgage is a great option for people who have a poor or little credit history. It helps you get pre-approved for a mortgage faster than traditional mortgages and allows you time to work on your finances by making on-time payments over the term to improve or create your credit score. An example of when to use a private mortgage might be if you have a large amount of debt you want to consolidate using your mortgage but, without having equity in your current home to do so. In this case, you might get a private mortgage for more than the value of your home so that you can use the excess to pay off your debt and condense your monthly payments into one manageable payment a month.
If you have an irregular income:
If you are self-employed and have an irregular source of income traditional lenders are most likely to deny your mortgage application. The reason being is that you may not be able to confirm how much you make in a year because your income is inconsistent, not fully recorded, and may look lower than what it actually is from tax deductions. A traditional mortgage lender won’t dig in to connect the dots of where your money comes from, they simply rely on documentation. If you can’t produce the paper trail to support your claim of income, they won’t approve you. With the fast housing market, you may not have time to go through a bunch of lenders to see if they will approve your application based on your interesting income streams, so a private mortgage would have a much higher success rate for you in terms of getting approved for the mortgage you need.
If you’re an immigrant and new to Canada:
If you haven’t been living and working in Canada for very long, it may be more challenging for you to get approved for a mortgage. A private mortgage lender will look into your foreign income, foreign credit history, and your Canadian employment history to paint the full picture of your finances. They factor in all your income abroad and local which makes it easier for you to get pre-approved for a private mortgage.
If you are buying a second investment property:
If you’re buying a second investment property as a fixer-upper, then a private mortgage may be the route to go. A traditional lender like a bank may refuse your mortgage approval if the property looks like it’s a write-off or if you already have too much debt or other mortgages in your name. You may be planning on fixing up the property and need a loan to help with construction and renos before you flip that property for profit. Banks may be wary about the construction of a commercial property, vacant land, or home in a rural area so they may be hesitant to approve you for a mortgage on those grounds alone. But, if you’re planning on flipping the house after you finish all the renos and you don’t plan to own the property for very long, then a private mortgage may be the best option for you as a bank wouldn’t make as much off of that mortgage either without you keeping the loan long term.
Traditional mortgage lenders may also be wary of untraditional homes like very small houses or mobile homes.
The cons of a private mortgage:
Although a private mortgage can make your homeownership goals attainable you should also be aware of the downfalls of a private mortgage too. Because the nature of the loan is of higher risk to the lender, you pay a higher interest rate. And, if for whatever reason you default on your mortgage payments and aren’t able to make your payments long-term you can expect much harsher penalties. You can also expect to pay a few extra fees to push things through be it administrative fees or verification report fees etc. So, although there is an opportunity to acquire a private mortgage you want to be 100% confident that you won’t have any issues making your payments on time and in full or you could end up in more hot water than you had expected. The best advice I think I can give here is when in doubt, wait it out. Meaning that if you are doubting your ability to be able to make the payments on a private mortgage or you are doubting that the pros outweigh the cons for your personal situation, it might make more sense to hold off on getting a mortgage until you are in a better financial position.
How to get a private mortgage and what you will need to secure it.
A private mortgage lender mainly looks into the home equity, rather than your previous credit history. To quality for a private mortgage, you will need proof of income to illustrate that you can pay off your mortgage payments, a downpayment (normally 15% of the purchase price), and a sellable property in case you can’t make your payments and the lender takes possession of the house.
It’s important to note that private lenders might not be licensed which means anyone can essentially become a private mortgage lender. Before you sign on for a private mortgage it’s a good idea to work with an experienced mortgage broker to help you find a reputable private lender. Doing a Google search for a private mortgage lender and signing up with the first one you find might be a disaster waiting to happen. It’s free to consult with a mortgage broker and the time you spend talking to one might turn out to be your best investment overall.
Should you wait instead of getting a private mortgage?
This decision is frankly up to you. You could wait to get approved for a mortgage through a traditional mortgage lender to save money on interest and build up equity in your home. However, housing market prices continue to grow higher and higher, especially going into the new year, so you must factor that in. It’s possible that getting a private mortgage now could actually save you money long-term depending on your specific situation. That’s why you need to review your mortgage options from all angles before making your decision.
Also, keep in mind that just because you are using a private mortgage, that does not mean you can’t get a traditional mortgage in the future when you can afford it. Private mortgages are meant to be short-term solutions to get you what you need while giving you time to work on improving your credit history or pay off old debt so that you can eventually roll into a traditional mortgage.
Possibly the most important takeaway: Work with a trusted mortgage broker!
The process of getting pre-approved for a mortgage can be overwhelming and challenging when you’re handling it on your own. A qualified and trusted mortgage broker, like myself, Darren Robinson, can help get you pre-approved for a mortgage while reviewing all of your options in detail. I can help guide you through the process and can shop around on your behalf to find the best mortgage rates and options to suit your needs. A private mortgage may be the choice for you but, it’s likely that there are other options you haven’t explored yet. Whether you’re looking for a mortgage for a house or an investment property, I can help you get pre-approved efficiently and from wherever you are with virtual appointments available. To get started give me a call today at 705-315-0516 or email me at [email protected]. I can help you with all the paperwork required and will answer any questions that you may have about the private lending process so you feel confident with the purchase of your new home.