If you are trying to take out a mortgage to buy that new house, but you’re having a hard time getting financing from a traditional lender, a private lender can step in and get you into that home with a short-term note that gives you the time to get your credit squared away so that a bank or brokerage will approve your application in a year or two. If you’ve never explored the idea of private mortgages before, take a look at these questions below that many of our clients have asked in the past. But first check out our introductory video about the process:
Answer: Interest rates vary depending on the down payment, existing equity, mortgage position, property type, ability to verify and the application. Generally, the more you can provide the more options that are available. Land only, Modular Homes, and other non-conventional properties are also subject to higher interest rates.
A typical private lending first mortgage on a residential property of 50% LTV warrants an 8% – 9% annual yield from a private lender. A general rule of thumb is for every 10% the LTV increases the annual yield increases by 1%. The Annual Yield is a combination of the contract rate and lender fee for each year. Brokerage Fees are extra.
A typical private 2 mortgage on a residential property starts at a 12% – 14% annual yield rate regardless of the LTV and will increase as the LTV increases. A general rule of thumb is for every 5% the LTV increases over 65%, the annual yield increases by 2%. The Annual Yield is a combination of the contract rate and lender fee for each year. Brokerage Fees are extra.
Answer: There are no upfront fees on residential private mortgages. With a construction completion mortgage, though, the customer does have to pay a broker fee after gaining approval. In addition, commercial mortgages require an upfront retainer brokerage fee due to the complexity and time required to execute such transations.
Answer: On your typical residential property in an urban centre, private lenders will loan up to 80% of the property value. We do have access to lenders that will lend greater than 80%, but there needs to be a either a clear and quick exit strategy and/or a favorable 1 st mortgage in place. Smaller rural communities are generally maxed out at 60% of the property value, with some lenders in the network that will consider 70%. ***Some exceptions apply to all files.***
Answer: Pre-payment penalties vary depending on the type of deal and the objective, but the common industry standard on closed mortgages is 3-months interest pre-payment, or a fixed percentage of original registered principal amount. Some provide open or partially open options. No pre-payment penalties will apply to a fully open mortgage.
Answer: Combined Brokerage & Lender Fees generally start at 4% of the gross mortgage on mortgages greater than $150,000. Combined Brokerage & Lender Fees generally start at 10% of the gross mortgage on mortgages less than $150,000.
Answer: As a property owner, it is your responsibility to put yourself in the best position possible to transition from private financing, but we also understand that life happens. When your maturity date is coming up, you will essentially have the following options:
- Renew with your existing lender. Good Repayment history is required for the Lender to consider.
- Refinance with a new private lender. All costs associated with securing a private mortgage will apply again.
- Refinance with a non-private lender provided you qualify. Minimal costs are associated with this option.
- List the property for sale and move.
- List the property for sale to an investor and become a tenant with an agreement to buy-back in the future or be a permanent tenant. If the above options are not exercised, the lender can/may initiate power of sale foreclosure proceedings.
Answer: The options when property is lacking are few, but there are options. If the property is in an urban center or direct surrounding area and there is 10%-15% equity, the options would be as follows:
- Provide some cash injection to meet a private lender’s criteria for the loan to value requirements.
- If other property is owned where there is adequate equity, a blanket mortgage can be considered.
- Sell your property. If the equity is less than 10%, the suggestion is to simply sell your home if you are in a foreclosure situation. (Refinance Situations)
- Enter in to Lease Buyback program. This is when an investor purchases the property from the property owner. A separate agreement is also prepared by both parties with the intention of the home being purchased back at a pre-determined date. (Refinance Situations)
Answer: This is a “YES” and a “NO”. First and Foremost, looking for direct private lenders through various website and newspaper ads is time consuming. If a direct private lender is found, it is unlikely that they are regulated by their provincial body. Mortgage Brokerages are regulated. The best option for anyone in need of private money is to obtain the funds from parents, family, or friends that are in the position to assist you. This may not be available nor a desirable option.
Dealing with just any broker isn’t recommended either. Many mortgage professionals find private lendingto be foreign. The downside to this is that they may not be familiar enough with private lending to provide adequate service. In addition, some mortgage brokers are too proud and will not inform their customers that they are unable to effectively work your application; so, they will instead shop your application or refer to another brokerage that is comfortable working on your file. While doing this, as a customer you end up paying fees for multiple brokers and the lender. Not the wisest decision.
Amansad Financial does not your files to other brokers. Once we have everything required for your application, a summary is presented to our DLGN (Direct Lender Group Network) without providing your confidential information or property details. Direct Private Lenders will basically get your first name, the property type, property value, a general location, the LTV ratios, and some background information. Our partners generally confirm interest within 2 business days, but in many cases the same day. When LTV’s exceed 80%, we have secondary options with our MIC partners.
Answer: The process is relatively fast provided we are receiving requested documents in a timely fashion. On average, once an appraisal, application, and supporting documents are received, a commitment can be issues in 3 days or less, but in many cases within 24 hours.
Answer: On standard urban residential properties where the combined mortgages on the property value is less than 65%, basically all this required is 2 pieces of Valid ID, a current mortgage statement, property tax assessment notice, an appraisal from an approved appraisal, and copy of home insurance policy. This is classified as equity based approval. When the LTV exceeds 65%, more documentation is needed such as appropriate income verification which varies depending on each file.
Answer: This is always a consideration. At times, there may not be enough equity in the primary property, so if you own other real estate with adequate equity, this will be considered. This is referred to a “blanket mortgage” or “Inter Alia” mortgage. This type of mortgage is not offered by traditional or semi-traditional lenders on residential real estate. It is only offered by private lending institutions and individual lenders.
Answer: Turnaround time, brokerage firm pre-underwriting, and transfer of trust from our DLGN (Direct Lender Group Network)
5 Steps to Success with your Private Mortgage
If you’re going to take out a private mortgage, you’re starting a relationship with a lender that will work a little differently than what you can expect from a bank or other traditional lender. Let’s take a look at some of the key differences, so you’ll know what you have in store.
Most people take out a private mortgage to get started on home ownership while they’re still repairing their credit. Private mortgages generally have short terms (often one to two years) and sometimes just allow interest-only payments. Private lenders do not have to renew mortgages when the term expires, so you want to keep your options open by making your repayments on time. Your credit score will improve (increasing your chances of a transition to a bank or other traditional lender at renewal). If you realize that you need to adjust your withdrawal date for a particular payment, give your lender at least a week’s notice.
If you change employers during the term of a private mortgage, there are no requirements mandating that you update that information. However if you do provide that update, you strengthen your relationship with the private lender, showing that you are serious about bettering your financial situation. Even if you haven’t notified your private lender of the change, that will be a requirement for extending or renewing the loan in many cases.
Improving Your Credit
If you took out a private mortgage while you intended to improve your credit, there are improvement counselors who can help you get that score up. The purpose of this is to help you qualify for a bank loan when the private mortgage term expires – which will save you tens of thousands of dollars over the amortization of the entire mortgage.
Obtaining New Credit
Try to avoid opening new lines of credit, and keep your credit inquiries to a minimum during the term of your private loan. These activities can affect your score adversely, which definitely will not help you when it’s time to shift from a private lender to a bank or traditional lender.
The Value of Communication
Remember – a private lender is entrusting you with a great deal of capital. The clearer your communication is, the stronger your relationship will be. Private lenders are much more willing to work with borrowers who are honest and upfront.
Amansad Financial Process
- Application sent to applicant(s)
- Application returned & reviewed
- Appraisal Completed & Commitment Issued
- Commitment returned & sent to DLGN
- Commitment is signed off by DLGN & instructed to Lenders lawyer
Most Other Brokerage Firms
- Applicant sent to applicants
- Applicant returned & reviewed
- Applicant sent to 1 private lender for underwriting.
- Underwriter sends to Lending Committee for review
- Commitment returned to brokerage firm if approved. If not approved, go back to step 3 with new lender
- Commitment Issued by Brokerage firm to applicant(s) with summary of terms and conditions
- Commitment returned to brokerage firm
- Commitment sent back to Private Lender by Brokerage Firm
- Lender Committee completes final review
- File Instructed to Lenders Lawyer for closing provided key conditions are satisfied by applicants.
As an Alberta Based Mortgage Broker with DLC Brokers for Life Inc.; Amansad Financial provides traditional bank financing, non-traditional, and private equity creative solutions to customers. Amansad Financial focuses on Alt-A, Private Equity Lending & Alternative Mortgage Solutions. If a borrower doesn’t fit a bank mold but have the necessary down payment or equity; obstacles can be overlooked with our private mortgage lending partners. With adequate equity or down payment, security, or a combination of both… a solution will likely be found. Borrower credit is the least of our worries.