Many borrowers – real estate investors included – think of private lenders as a last-resort option if they can’t secure financing anywhere else. However, private mortgages have gained traction as a financing option due to tighter mortgage rules set by the federal government and the continued caution being exercised by institutional lenders.
Why Should You Get A Private Mortgage?
- Do not want to deal with a bank
- Bank already said ‘No’
- Already know the bank won’t do your particular deal
- Bruised Credit
- Need funds quicker than a bank can provide it
- The list can go on
- Do not have enough down payment or don’t want to have an insured mortgage
Why Do You Need A Mortgage Broker for a Private Mortgage?
Private mortgage lenders operate differently from banks and other mortgage lenders. One of the major differences is their source of funding which they get through individual investors or groups of investors. Larger lenders can have several different funding sources or include a pool of mortgages called a MIC (mortgage investment corporation) while smaller investors might simply lend out their own money. In both cases, the private mortgage is seen as a short-term investment that can be sold off within a year or two as opposed to something to keep on a balance sheet. For better client protection, Express Capital tried to obtain funds from MICs first prior to going to a small investor.
Another difference between institutional mortgages and private mortgages is the application process. The property is what the lender focuses on whereas the banks focus equally on the borrower. This is because private loans are uninsured, meaning the lender must fall back on the property should a default occur. For this reason, properties in small towns or rural areas are difficult to get qualified or ay only qualify for up to 65% of the property value compared to 85 per cent in an urban center…Toronto, Hamilton or Ottawa, for example(s).
After the lender accepts the property, they look at the character of the client, their ability to repay, and the at times purpose for the funds. Many private lenders do not need income verified which is also attractive to many real estate investors.
A noteworthiness statement, do understand that private mortgages are also more costly. Most come with lender fees and the rates are higher than that of a bank or AAA mortgage lenders.
Where to look for a private mortgage?
While it’s possible for consumers to directly access a couple private lenders, most borrowers looking for these types of funds go through a mortgage broker who having connections to many private lenders and investors all the while keeping your best interest in mind.