If you’re brand new to the mortgage lending process, the term “private lending” might be new to you. Most first-time home buyers think that the only place you can get a mortgage is a bank, or maybe a mortgage broker. However, the industry serving borrowers is much bigger and has many more options — including private lending.
You probably already knew this, but just to be clear — a “mortgage” is a loan that real property secures. The mortgage contract, or note, indicates that you have taken out money and used the real property as the security in case of default. For, most people, the payment they make on their mortgage each month is the biggest check they write (or draft they authorize), and the real property that they buy constitutes the largest single investment that they will make.
Private lenders serve borrowers who have the means to pay off a note but who lack some of the documentation that the banks require in order to approval a traditional mortgage. Some people have gone through credit problems in the past that have their score too low; others have difficulty with income verification, either because they have changed employers several times in the past few years, or they work for themselves, and so there is no third-party verification for their income claims.
So when you approach a private lender, that entity knows that you will have some element(s) of your lending application that are not in line with what the banks want to see. Credit score is a factor, but not to the degree that the banks use it. The location is more important; and the LTV (loan-to-value) ratio on the loan is particularly important, because if you do go into default on your loan, the lender wants to make sure that he or she can still come out ahead in a forced sale. That is why you should expect to put 25 or 30 percent down in most cases on a private mortgage — and up to 40 percent in rural parts of Saskatchewan.
Why do you have to make a higher down payment out in the country? In the event of a default and forced sale, you would likely take longer to sell your house, and the price would likely not be as high. In urban centers, it is easier to sell properties more quickly.
You can expect to pay a higher interest rate for a private loan that you would through a bank, often as high as 10 or 12 percent. However, you should also expect a shorter term, something along the lines of a year or two. The idea is that you start making payments while you move into the property that you want, while you work on fixing your credit, or spiffing up your income history, so that you can get bank approval before the term expires, and then you can get a better interest rate at renewal.
In Saskatchewan, you should expect to pay fees that are somewhat higher than in the other provinces. One reason for this has to do with provincial law regarding the foreclosure process, which takes longer to resolve. The higher fees help the private lender absorb the risk of delayed repayment in case that things have to go to foreclosure. While the lender can recover the vast majority of costs through the foreclosure process, that’s not true about all of the fees, which is why the risk gets passed onto the borrower.
If you’re interested in living in one of Saskatchewan’s urban areas — Saskatoon, Regina, Moosejaw, North Battleford, Yorkton, Swift Current, Estevan, Weyburn, and Lloydminster, for example — your chances of approval with a private loan are significantly higher. However, you can often get approval in a more outlying area; our lending network considers those applications on an individual basis.
One area in which our lending network does not work is land with any existing farming activity or with any agricultural zoning. Farm Credit Canada (FCC) is your best bet if you’re looking at that sort of land and are having a hard time finding bank financing.
If you have more questions about private lending in Saskatchewan (or any other questions about mortgage lending in Western Canada), give one of our solutions experts at Amansad Financial a call today. We will go over your options with you and develop a personalized plan to move toward home ownership.