Getting the excitement to get the keys to your home is similar to how fast you want to get your loan. Imagine having the scissors cut the ribbon that ties your home enclosed. The joyful moment is incomparable after dwelling on your mortgage journey. How happy that event would cross from your bucket list.
However, a first-time homebuyer may find it challenging to search for the best deal for his mortgage. But on the other hand, he can choose from different types of lenders.
Having a low score is familiar to most people, wherein traditional lenders only allow borrowers with good to healthy scores. However, purchasing a home with a low score should not stop you from getting your first home loan. Meanwhile, a Private mortgage lender works for everybody with a complex score.
This article will discuss everything you need to know about this type of mortgage lender, how they work and how they will be a good choice for you.
You can assess if a private loan will meet your mortgage needs as you go along with this article. But first, you need to know what kind of lender they are and how it works for you.
What Is A Private Mortgage Lender, And How Do They Work?
These mortgage lenders are private corporations that offer a loan without a minimum credit score requirement. These lenders are not provincially or federally regulated. On the other hand, they allow homebuyers have secured loans after being disqualified by a traditional loan from banks or financial institutions.
Most people choose these lenders since they don’t look strictly at credit score status and credit history. For instance, purchasing a home with a poor score and a low source of income is still possible even if you have credit card debt. Homebuyers can shop for different mortgage lenders that best meet their needs.
These mortgage lenders have a higher interest cost offer than the traditional lenders as they look only into loan interest. However, getting this mortgage lender can give you a faster application, but note that they have higher interest rates and fees.
Above all, their benefits become more successful if you keep up with their payment terms. As a result, you can apply for a mortgage from a traditional lender if you’ve been a good borrower under them.
Why Should You Consider a Private Mortgage Lender?
Traditional lenders such as banks or financial institutions often make it harder to qualify if your score doesn’t meet their requirements. In most scenarios, they will turn down your application.
Having a low credit score below 600 leads to a private mortgage lender. In other words, they don’t require credit health. On the other hand, they can provide loans that other lenders won’t.
Different types of Private Mortgage Lenders
The following are the common types of private mortgage lenders in Canada:
The private personal lender or Individual lenders
- An individual investing his money to private lends a person on a one-to-one basis.
The Group Investor or Syndicate Investors
- This type of mortgage lender comes with investors who invest their own money collectively into a single mortgage.
Mortgage Investment Corporation (MIC)
- Group of investors pool their money and make them simultaneously open to investing in the different mortgages. To qualify, this type of lender makes borrowers meet specific criteria.
Know When to Choose a Private Mortgage Lender
A private loan has a higher interest rate, fees, and a shorter amortization period than traditional lenders. In that case, choosing this mortgage lender may be considered when:
- Turned down by traditional lenders because of low scores and poor credit history.
- Unable to meet traditional lenders’ income requirements.
- You need the money immediately, and you don’t have time to get along with the traditional lender’s process.
- A need for a short-term loan.
- Irregular income or self-employed.
- You are buying a property that a traditional lender won’t finance.
- You’re a newcomer to Canada who doesn’t have everything established, such as fulfilling the standards of traditional lenders, credit score and credit history, employment history. In other words, it will be hard for you to get qualified for a conventional lender.
Quality of a Private Mortgage Lender
- Private mortgage rates can range from 10-18% highest compared to traditional lenders such as central banks, credit unions, and bad credit mortgage lenders.
- Private mortgage fees can range from 1-3% in your loan, including set-up costs and broker fees.
- Available terms last from 1-3 years. Renewal of the mortgage with your current lender is an option.
Private Mortgage Advantages and Disadvantages
- There is no minimum credit score requirement, and suitable for people with low scores and poor credit history.
- Quick approval process.
- Open for non-confirmable income or irregular income.
- Can help rebuild and repair your credit.
- Higher interest rates
- Additional fees
- Loan interest payment only that doesn’t help you pay your principal mortgage.
- Riskier to put your home on a foreclosure more advanced than traditional lenders once you get a delay on your mortgage payment.
How To Get A Private Mortgage Loan
While it’s possible to educate yourself by getting a private loan, asking a reputable mortgage broker is also a good idea. A mortgage broker will be the middle man who will connect you to a private lender with the best deal. In addition, they will help you with your application process.
Choosing this type of mortgage lender makes your application extra faster and easier. Usually, approval will take a day or week, and the release of the loan will be two to three weeks. However, it doesn’t mean that there will be no eligibility.
To qualify for a private mortgage lender in Toronto, they look at the following criteria.
Proof of Income
- It would be best to impress them that you have a dependable income to repay them. If you’re self-employed, supplementary documents are required. There are two income categories; confirmable and non-confirmable.
- These types of lenders prefer borrowers with a confirmable or sustainable income. However, Notice of Assessment (NOAs) should approve this income category.
- Non-confirmable income is typical with a self-employed or project-based individual. In other words, this lender will ask you to provide additional documents.
Property type and value
- The property must undergo an approval evaluation of average to good.
- This evaluation is needed to secure your payment if you default on a mortgage, especially with a low score. This lender is weighing the risk they’re taking before you get approved.
- The minimum loan-to-value ratio on a property is 85% and needs a down payment of at least 15% to get approved. On the other hand, you may want private mortgage insurance if you wish to give less than a 20% down payment.
- A larger down payment demonstrates that you have more money to invest or repay them. It builds trust in the eye of private lenders that you can keep up with your mortgage. Furthermore, it shows that you have more when you’re at stake.
- A maximum loan to value is increased up to 85% by your private lender if you refinance. A refinance is a loan strategy of getting a new mortgage with new terms to close your existing mortgage.
Private Mortgage Rates and Fees
These mortgage lenders have their set fees and lending terms as they are not regulated in Canada. In other words, these private lenders have differences from the other private lenders in terms of the offer. By that, you have the decision to decide and choose.
Mortgage rates depend on the property, borrower, and current economic conditions. Commonly, the interest rates range from 10-to 18%. Having a low score makes borrowers choose a private lender after being disqualified by traditional lenders.
Also, the rate depends on lender types. For instance, Mortgage Investment Corporations (MIC) will want a higher rate of return for their investors.
Private Mortgage Interest Calculation
To give you an example. A first-time homebuyer borrowed $500, 000 at a 9% interest rate on a 3-year term.
The following provides the monthly payments and total interest calculation over the term.
- Calculate the monthly payment
9% (annual interest rate)
÷ 12 (months in a year)
= 0.75% (monthly interest rate)
x $500, 000 (mortgage amount)
= $3, 750 (monthly interest payment)
- Calculate the total interest over the term
$3, 750 (monthly interest payment)
x 12 (months in a year)
x 3 (years in term)
= $135, 000 (monthly interest rate)
At the end of the 3-year term, the borrower would have made $135, 000 as the monthly interest rate. On the other hand, the borrower would still owe the lender the complete $500, 000 principal back.
Private Loans As Short-term Funding
A private mortgage lender can also be addressed as a bridge to get you through your financial situation. It serves as help when you face a financial problem such as job loss, unexpected huge expenses, and divorce.
On the other hand, they offer security for long-term loans. For instance, financing your down payment to purchase a home. At the same time, it provides temporary funding for personal finances or commercial renovations.
Private lenders have a lot of benefits to access quick financing that traditional lenders cannot.
Most Common Specialized Areas by Private Mortgage Lenders
Commercial mortgages and Residential mortgages
- Private lenders generally concentrate within a property type value to work exclusively in real estate investment.
Refinancing to consolidate your existing debt
- Most private lenders offer to refinance a mortgage or give equity-based loans for their borrowers to complete their existing mortgage.
Refinancing for renovations
- Private lenders also give a loan to borrowers for renovating their houses or commercial properties.
Financing for house construction
- Most private lenders provide construction loans for commercial or personal use.
Financing for additional properties
- Some private lenders allow borrowers who need extra funds for other properties.
Mostly prefer Urban areas
- These mortgage lenders prefer to lend a loan for borrowers in urban areas for easy access to selling the property once you default. However, some lender lends to non-urban areas for less competition.
To Sum Up!
A mortgage applicant with a low credit score may seem to be a drawback for traditional lenders. However, that situation shouldn’t stop you from buying your home. The correct information and efforts of shopping around different private mortgage lenders can translate your goal into reality.
These types of lenders could be your one-call-away as they don’t look at you regardless of your score. On the other hand, you might want to assess the lenders of your choice if they meet your financial situation.
Educating yourself by private loan benefits can help you, but asking a reputable mortgage broker could also mean considerable help to your journey. Most importantly, don’t forget to look at their pros and cons so you can define your decisions.