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A private mortgage loan is a short-term loan, ranging from 1 to 3 years. These types of loans are interest-only and do not require homeowners to pay the mortgage principal down. Instead, the only requirement is to pay interest each month.
Private lenders know that conservative lending guidelines used by banks and conventional lenders do not include many individuals who pay back loans. In addition to this, the private lenders take a property’s overall value and marketability into account and have no credit history.
Not convinced to go for a private mortgage from private lenders? Here are a few reasons why should you go for it.
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Why You Should Use Private Mortgage Lender?
Here are the most compelling reasons why you should use private mortgage lenders.
- A private mortgage lender enables you to purchase an unconventional property that won’t be possible with prime lender or bank
- Prime lenders and banks require patience; whereas, in private lending, the approval and funds transfer is fast
- The conventional lender will turn you down if you have a bad credit history. Not the case with private lenders as you get finances anyhow
- Private lenders are best for a short-term loan
- Finances can be approved with non confirmable income that would otherwise interrupt your approval
Types of Private Mortgage Lenders
There are mainly three types of private mortgage lenders.
1. Individual Lender: Individuals who lend personal funds in order to have a steady return, fall under this category.
2. Syndicate: In this, multiple individual lenders form a group to gather their funds and then invest it on a case-by-case basis. The prime example of this type of lending is CapitalDirect.
3. Mortgage Investment Corp: Here a group of investors pool funds, which is available for several deals at once. However, the only condition required is one should meat lending guidelines.
A private mortgage is the prime choice of many borrowers. So, it is important to know a few of its characteritics here.
Private mortgage rates are the highest when comapared to prime lenders. The interest rate usually ranges from 10 to 18 percent in private mortgage. The fee is also higher than the prime lenders as it falls around 1 to 3 percent. This include broker fees and set-up costs of the mortgage.
The available terms of mortgage range from 1 to 35 years. So, it is advisable to use it as your last resort.
Private Mortgage Rates & Fees
Mortgage interest rate usually ranges from 10 to 18 percent depending on the property, borrower and current economic conditions. Since they are almost always higher than rates offered by conventional mortgage lenders, you must only go for private lender when you are turned down by the banks due to bad credit.
The fees depends on the source of funding. For instance, if a private lender is funded by a MIC, then they will want to make a solid rate of return for their investors.
With prime or conventional lender, the broker takes a commission directly from the lender. However, with private lender, you pay the broker’s fee directly. Private loans also cost set-up fees as the total fees paid is 1 to 3 percent of the loan amount.
The good news, however, is that this fee can be financed through the mortgage loan. To understand it better, let’s say you need to borrow $100,000. So, your fees will be $3,000 at the rate of 3%. In order to cover this fee, you can apply for a loan of $103,000 to cover the extra costs.
What Time Frame You can Expect With A Private Loan?
It can take a couple of days to a week for your application to get the complete approval. However, the procesing of the loan and the release of funding takes around 2-3 weeks.
Private mortgage lenders prefer their clients to be able to transfer on to a prime lender within a year to 18 months. They deal in fast financing and thus need to be able to collect their return on investment within the specified time. Therefore, a private lender will try to help the client move on to a prime lender, which is also in the client’s best interest.
Criteria To Get Private Mortgage Loans
As mentioned already, private lenders have tighter guidelines as they need to compensate for the higher risk. Below are a few of the guidelines which you must fulfill in order to get approval.
1. Property type and value: This is the most important factor to get you approved by a private lender. The mortgaged property must be in good condition and must undergo a strict appraisal before you are approved. Due to the poor credit history, the lenders need to ensure that the investment is secure.
2. Income: There are two types of income: confirmable and non-confirmable income. Confirmable income is more preferred by lenders and is proven through Notice of Assessments. Non-confirmable income, common among self-employed or commission-based employees, requires lenders to use an estimate of your income based on the average income typical of your employment.
3. Down Payment: The minimum loan-to-value ratio on the property is 85%. It means you need to put in a down payment of at least 15% to be approved. If you can afford to put in a higher down payment, then it is advisable to do so as lenders take it as a sign that you can keep track of your personal finances.
4. Equity: If you are refinancing, private lenders may allow you to go up to a maximum of 85% in loan-to-value. For instance, if the value of your property is $400k, you can refinance up to $340k.
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The Bottom Line
If you have signed up for a collateral mortgage with a bank, you have essentially pledged all your equity to that bank. Consequently, it makes it impossible for another lender, even a private lender, to refinance your property, give a private mortgage loan, or even provide a second mortgage.
A good mortgage broker can help you connect to the right private mortgage lender. The broker will charge you a small upfront fee for it too. But that fee is worth it as the broker will provide you with the lowest mortgage rate for your financial needs.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, leave us a message and we will try to connect you with local realtors and sourcing for financing.