What is a Private Mortgage?
Private mortgages can help when institutional lenders like banks are unable or unwilling to lend money. They offer an alternative source of financing to the unsuccessful borrower. Traditional lending institutions tend to have structured lending guidelines where as private mortgages are based primarily on the equity a client has in their home. Another difference between private mortgage lenders and traditional lenders is that private mortgage lenders often specialize in certain types of investments, like commercial or residential, or based on the reason for the mortgage (refinance for renovations or debt consolidation are two specializations.)
A good mortgage broker can help you navigate the specializations and guidelines to find the right lender for you.
Characteristics of a Private Mortgage
Private mortgages are generally short term (from one to three years), interest only loans which mean they typically do not require the borrower to pay the principal down, instead requiring that a borrower pay only interest each month. There are costs that borrowers might not expect with a private mortgage – lender fees, mortgage broker fees and legal fees are just a few of the costs that a borrower will be expected to cover. These are often rolled into the mortgage amount, which leads to a higher interest payment each month. Fees can range from 1-3% of the loan’s total, depending on the mortgage lender.
Ratehub.ca notes that the interest on a private mortgage can range from 10-18%, and that this is the highest rate, behind prime lenders and bad credit lenders.
When it comes to a private mortgage, it’s not the borrower who gets the most attention, it’s the property itself. Location is an important consideration, as is the overall condition of the property itself. If a property looks like it’s easy to sell, that’s a point in favor of a private mortgage. If those things are satisfactory to a private lender, then the lender looks at the purpose of the funds and the character’s ability to repay. Available down payment and equity are also considerations in whether a lender will offer a mortgage or not. Typically though, a lender will be most concerned about a borrower’s actual equity in the property and the property itself.
Why would I use a private mortgage lender?
You would use a private mortgage under any of the following circumstances:
- You need fast financing and don’t want to wait for the typical approval process
- You are being turned down by conventional lenders due to prior poor credit history
- You only need a short-term loan.
- You have non-confirmable income that is preventing you from obtaining a traditional mortgage.
- You want to purchase an unconventional property that a prime lender or bank won’t finance.
- You have an emergency situation
- You are in power of sale
Where to Get a Private Mortgage
There are several types of private mortgage lenders. Each has their own expectations and sources of funding. Some may be able to provide larger private mortgages than others. The three types of private mortgage lenders are:
- Individuals: a single person that is lending their own funds in an effort to earn a return
- Syndicate: a group of single investors form a group, pooling their funds and investing on a case by case basis from that pool of funds
- Mortgage Investment Company: a group of investors who pool their funds and invest into multiple mortgages at any given time as long as it meets lending requirements.
You may want to go through a mortgage broker, such as Colin Eby at CVE Mortgage Group, to find the right private mortgage lender for your situation. A broker often has a wide range of connections to lenders who are willing to finance private mortgages. CVE Mortgage Group, Inc. can help you find the right lender for your mortgage and get you the best deal possible.
Tips for Working with a Private Mortgage Lender
When you find that mortgage lender, there are a few things that you can do to protect yourself and your investment.
Experts suggest that you need to act with caution and that you should be sure you’re comfortable with your broker and all aspects of your mortgage. Ask questions when they come up and be sure that you’ve reviewed the contract with a lawyer to ensure that everything is on the up and up.
Use your relationship with your mortgage broker to find other financing quickly, because private mortgages are short term options, typically for 1-3 years.
Make sure you know what this mortgage will cost you, in terms of interest payments and all of the fees. Find out what the prepayment penalty or exit fee is and budget for all of those things.
CVE Mortgage Group Inc., has a team of trained mortgage professionals who are ready to help you find the right private mortgage lender and terms to fit your situation. Contact us today to learn more.