Can’t Get a Bank Mortgage? How Do Private Mortgages Work?
1 September, 2017 / by Bryan Jaskolka
Not everyone can qualify for a mortgage these days. Government regulations targeting down payments, investment properties and high-ratio buyers mean that more Canadians won’t qualify for a home loan.
It’s often said that housing is the bedrock of the Canadian economy. But for years, federal regulations have clamped down on the ability to qualify for a mortgage. The self-employed, individuals living in rural areas and those with past credit troubles have long struggled with home financing. Now that struggle is extending to other segments of the population.
Against this backdrop, more and more Canadians are turning to private mortgage lenders for their home financing needs. Although many borrowers think of private mortgages as a last-resort option, they are a viable option for many people.
Private Mortgage Lenders Operate Differently from Banks
A private mortgage is simply a home loan offered by an individual or company other than a bank or traditional finance provider.
One of the biggest benefits of working with a private lender is they operate differently from traditional banks on many levels. Since they get their money through individual investors or groups of investors, they have the freedom to set their own lending criteria. This means they are more flexible in the application process and don’t have to deal with the stringent guidelines set forth by the major institutions. This means that if your situation falls outside conventional lending guidelines, a private mortgage could be your best bet.
Private mortgages are often suitable if you:
- Are self-employed
- Want to purchase raw land or unique property
- Have less than ideal credit
- Want to invest in real estate
- Need access to equity in your home, but don’t want to refinance your first bank mortgage due to excessive penalties
- Need to consolidate high interest rate debt
- Are looking to renovate existing property
- Looking for a short-term loan
How Private Mortgages Work
If you’re exploring a private mortgage, the first step is to seek out a broker who provides alternative lending services. The broker will assess your situation and determine if you are eligible for a loan. In particular, they will assess your ability to make the loan payments on time.
From there, the broker will then search for the best mortgage solution that meets your specific needs. They will then structure the deal and put in place an exit strategy so that you know how long the private mortgage will last.
It’s important to note that private lenders usually lend on location. That’s because private mortgages are uninsured, which means the lender falls back on the property should a default occur. That’s why location of the property is extremely vital in determining whether you qualify for a private mortgage and the rate that you’re offered.
Broker fees and legal fees generally apply when securing a private mortgage.
Private mortgages are growing in popularity as more borrowers fall outside the traditional lending guidelines set forth by the major banks. The good news is there are plenty of options for those looking for an alternative lending solution to finance their next property or major purchase.