Private Financing

In the Canadian mortgage market, there are three major classifications of mortgage lenders:

  1. A - Traditional (prime) lenders (chartered banks, virtual mortgage houses)
  2. B - Non-conforming or sub-prime lenders
  3. C - Private lenders

If your application still doesn’t fit within sub-prime lender (B) guidelines, a private mortgage is another option. Private lenders will generally require at least 25% equity or down payment and a readily marketable property. For remote or rural properties, many private lenders will often require approximately 50% equity.

Here are a few examples of applications that will work only with a private lender:

  1. If you are in foreclosure, a private lender may be able to refinance your mortgage so you avoid foreclosure.
  2. You don’t have proof of income – Sometimes you cannot show the required proof of income or the proof you can provide will not be accepted by traditional or non-traditional lenders.
  3. You need a second mortgage to consolidate debt and your credit isn’t good – This is a solution when you have equity in your home (at least 25% after consolidation). This lowers your monthly payments and interest costs. This will allow you to improve your credit score and free up some credit lines for future needs.
  4. You’re purchasing or refinancing a commercial property and you cannot show repayment ability (e.g., financial statements) or a track record of income.
  5. The property you are buying is in a remote area or is raw land (usually 50% equity is required).

The Private Lender

Private lenders could be anybody. Usually, they are people with extra money to invest. To them, investing in mortgages allows them to achieve a higher return on investment (ROI) compared with bank savings accounts or GICs. The lender could also be a Mortgage Investment Corporation (MIC). This is a corporation established solely to invest in mortgages. By setting up a corporation, individual investors can pool their funds and invest in several mortgages, thereby diversifying the risk.

It is very important that you work with a mortgage broker you can trust since you probably will not know the lender. You’ll need to rely on the mortgage broker that will place you with a reliable and reputable lender. Otherwise, you could face problems when you need to renew your mortgage if the lender decides that they want their money back.

In general, it is safe to say that private first mortgages interest rates will range from 10-15%. Private second mortgages will range from 15-24%, all of which depends on the lender.

A private loan is a property and equity based loan. This is what they would want to know:

  1. Where is the property?
  2. How much does it appraise for?
  3. What is the condition of the property?
  4. How much equity do you have in the property?

Each lender will have their guidelines as to the level of financing they can provide. Some will go to up to 65%, others up to 75% for urban properties. As the financing level increases, you can expect that the interest rate will increase.

Rural properties are harder to finance. Lenders may limit their exposure to 65% (or less) of the value of the property.

How Do You Choose a Private Lender?

Obtaining private financing is very different from obtaining a traditional mortgage. There are hundreds of private lenders and there’s really no way to know who offers the best rates and fees at any one point in time so choosing a good and honest mortgage broker is key.

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