Table of Contents
- Common Private Lending Scenarios
- Private Lending Restrictions and Requirements
- Private Lender Fees
- Working With a Private Lender
More and more Canadians are going to private lenders to get money for their mortgages. People who want to buy a home often have their dreams snatched away by stricter mortgage rules and tightening the lending gap.
Private mortgages follow the same rules as those which many banks follow. However, these rules aren’t as strict as they used to be; they can be used to come up with new ways to get money. Many financing situations can’t be categorized by a certain set of rules that don’t allow for compromise. It makes sense that it would be hard for big banks to change their policies to meet the needs of their customers; financiers who are smaller and more flexible can make exceptions and change a product box to fit a customer’s needs, instead of trying to fit a customer into a box that doesn’t fit.
Getting a mortgage or refinancing from a private lender isn’t the only thing Canadians want to do. For example, they might take advantage of a rise in home equity to add an extra room to their detached house. In this case, many traditional lenders may not lend to you.
Common Private Lending Scenarios
Traditional banks need a significant amount of documents to prove your repayment capabilities. This excludes numerous debtors. Self-employed candidates, for example, may not always provide T4 forms and regular pay stubs, disqualifying them automatically.
Some common private lending cases include:
- Interim financing
- Rental investment properties
- Vacation homes
- Multifamily properties
- Construction financing
- Second mortgages
- Higher debt load than acceptable by banks
- Self-employed borrowers
- Low credit score
- Unverifiable employment income
One situation private lenders often see is a mortgage candidate almost finished building a new house but is over their budget. Their mortgage lender has declined their request for further funding. How will they finish their home? They should consider a private lender.
Private Lending Restrictions and Requirements
Many private lenders specialize in a certain market segment. A lender who just wants to provide second mortgages on residential properties may only dabble in construction finance, since they have experience in homebuilding.
Lenders may also impose geographic restrictions; only smaller townships may be excluded. No one defines a worldwide lending policy which private lenders agree on or are governed by. Borrowers should seek a private lender who best suits their needs, not just for better rates and terms – but also for a faster loan approval procedure.
Private lenders are more flexible than banks when it comes to qualifying standards. Private loan applicants will discover fewer documentation is required and less stringent restrictions. Employment and credit history are less important as long as you can show you have the funds to repay the loan. The lender’s main worry is the asset’s equity. If you own a $100,000 house with $40,000 equity and the lender is willing to lend up to 75%, you will qualify for a $30,000 second mortgage.
A private lender may also want an exit strategy, which details how you plan to repay the loan after the term concludes. Essentially, the borrower must convince the lender of their ability to repay the loan and of their source of finances.
Common exit strategy examples include:
- Renovate and resell (fix and flip)
- Construct a house on an undeveloped parcel of land, then refinance
- A debt consolidation procedure to improve bad credit
- Having another property on the market and using interim financing until that property sells
- Awaiting an inheritance or the resolution of a legal dispute
Private Lender Fees
Because private lenders take on more risk than banks, they offer higher interest rates.
Private lenders’ interest rates range from a few percentage points over bank rates to double-digit rates. The rate is determined by several factors contributing to the loan’s risk. These factors often include the property’s equity percentage, mortgage position (first, second, etc.), property type and documents submitted. The lender takes on more risk when there’s less equity in the property; thus, the interest rate paid to hedge that risk is greater. Defaulted loans are secured by equity.
The bank pays the broker’s costs directly when managing a mortgage loan procedure with a conventional lender; the borrower is solely accountable for these costs in the event of a private mortgage. These costs normally vary from 1% to 3% of the loan amount. Many mortgage lenders enable these expenses to be financed which are put on the mortgage.
Working With a Private Lender
Because most private mortgage loans are for one to two years, it’s in the private lender’s best interest to help the borrower move to a prime lender when the private loan term ends. If the customer has bad credit, a lender with a trained mortgage broker staff will assist monitoring and improving the score. This help can range from debt consolidation to just monitoring and devising a strategy for the customer to pay down their obligations and improve their credit score. Clients benefit from working with a private lender who also houses a mortgage brokerage team interacting with prime lenders and being rewarded for their achievements.
With increasing interest rates and new mortgage requirements preventing many Canadians from owning a house, more people are turning to alternative lenders. Independent contractors, undocumented workers, and those with bad credit are finding more and more possibilities. It’s best to choose a private lender with a varied staff specializing in private and standard loans.
Choose Amansad Financial for Your Private Mortgage
Amansad Direct Lending Group offers the resources and relationships necessary to get the financing you need for a house, property or business. Contact us to get a Private Mortgage Solution that meets your requirements. For more information, visit us online or call us at (877) 756-1119 today.