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:
What’s the interest rate going to be?
This depends on several factors: existing equity, down payment size, mortgage position, property type and the amount of documentation you can provide. Your equity and down payment size will affect the loan to value ratio (LTV). If the property is worth $500,000, but you are purchasing it for $475,000, and you can put $175,000 down, you only need a $300,000 mortgage. That’s a 60% LTV ratio ($300,000 / $500,000). If you can get that down to 50%, you can expect about a 5-6 percent contract rate, but the higher the ratio, the higher the interest rate, about a point for every 10 percent increase in the ratio.
If the private mortgage will be in second position, the rate goes up as well, because of the elevated risk. In the case of default, the first mortgage has to be satisfied in full before any funds can go to the second mortgage.
What fees do I have to pay up front?
In the case of a residential private mortgage, there is nothing to pay up front. 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.
What’s the highest LTV ratio that someone will fund?
Private lenders will generally go as high as 75% on residential property in large cities. Some lenders will go as high as 85% or even 90%, depending on the market and the situation. If the property is in a smaller rural town, most lenders stop at 65%, while some will go as high as 75%.
Are there penalties for early prepayment?
If the mortgage is closed, expect a pre-payment penalty of three months’ interest. If the loan is open, though, there is no penalty.
What fees would I have to pay at closing?
Anticipate fees of about 5% to 10% percent of the gross mortgage amount that you are requesting, but the exact amount will depend on the lender. Some of the typical parts of this total are the fees to the lender, the cost of preparing legal documents, title insurance and the cost of the appraisal.
What happens if I can’t get traditional funding at the end of the term with my private lender?
In most cases, our clients get their credit and other elements of their mortgage application in position to get traditional lending at the end of the term. However, not everyone can get quite there. In those cases, you can usually either renew with the same private lender or refinance with a new private lender. You could also sell the property and become a tenant to the purchaser. The sooner you let your private lender know the situation, the more likely he will be to work with you.
What if I can’t get the LTV ratio low enough for approval?
There are not always a lot of choices in this situation. However, if you have other property that has enough equity, blanket mortgages for both properies are a possibility. You can also enter a lease buy-back program with an investor where you live as a tenant and work to improve your credit and buy the house back at an agreed price at a certain point in the future. If you’re facing a foreclosure situation and can’t get private lending, you could also sell the home and move out to avoid that damage to your credit.
Should I use a broker or a direct private lender?
One risk with using a direct private lender is that those transactions are not regulated at the provincial level, leaving the borrower with few protections. Don’t just sign up with any broker, though. Make sure that you work with a broker who is comfortable dealing with private lenders – and make sure that your broker isn’t just shopping your note to other brokers. You can do this by asking for a breakdown of all the brokerage fees on the proposal. If there are multiple brokerage fees, it’s time to move your loan to a more reputable broker. Amansad Financial never shops loans or files to other brokers.
How long does it take to get a private mortgage?
Once we get the application package, we can get an answer from a lender within a couple of business days. Once you and the lender have both signed the commitment paperwork, the funding can happen in as few as three more business days.
What documentation is necessary for a private mortgage?
You’ll need to submit two pieces of valid identification, a current mortgage statement, an approved appraisal, a property tax assessment notice and a copy of the home insurance policy, if you’re applying for a private loan to take the place of an existing mortgage. In most cases is all you’ll need if the LTV is at 65% or below. If it’s higher, you’ll need some method of income verification as well.
Can other real estate properties serve as security for a private loan?
If you have equity in other properties, and if your loan application falls above a 75% LTV ratio, adding this other property as collateral often works in what is known as a “blanket mortgage.” Only individual lenders and private lending entities offer this service.
If you have any other questions, please reach out to one of our private lending specialists at Amansad Financial. We look forward to helping you find the loan that you deserve!