Bob Hope (British American comedian) once said:
“A bank is a place that will offer you money if you can prove that you don’t need it”
Does this quote somehow justify why more and more homebuyers are choosing private mortgages over typical financial institutes like banks?
The terms, conditions, and formalities defined by banks are somehow restricted, as compared to private mortgages.
A private mortgage is a non-bank mortgage, typically financed by investment corporations or private individuals. Private mortgages come in all shapes and sizes but generally, they have a short-term tenure between 6 months to 3 years.
The loan provided is usually in the form of hard money or asset-based loans and the decision to provide money is based on the equity and value of the property benign put up as collateral.
Opposite to institutional lenders like banks, private lenders are not regulated by the Bank of Canada, and they can set their lending requirements and criteria. This permits private lenders to focus more on borrowers’ assets rather than the individuals who are borrowing the money based on their credit.
Canadian banks are required to follow the guidelines set up by the Bank of Canada while determining how to underwrite files and approve mortgages. On January 1, 2018, Canada’s federal financial regulator announced new updates altering how Canadian banks can support borrowers. The new “stress test” aims to ensure Canadian borrowers can financially manage the interest rates rise above their contractual rate.
These policy changes have produced challenges for many home buyers in obtaining traditional financing from banks as the expenditure increased more.
As opposed to the banks, Canadian private lenders are not liable for these regulations. In response to this, many Canadians have turned to private lenders to leverage their versatility. By focusing more on the borrower’s assets rather than the borrower, private lenders can offset default risks by applying the borrower’s assets as a guarantee.
Private lenders typically require similar information as a bank, such as income documents and credit information, however, the purpose of a private mortgage it’s for finding the borrower’s best rate over qualifying for finances.
A private mortgage can be the best solution for multiple borrowers under multiple scenarios:
The mortgage broker works as an intermediary with both borrower and the lender to get the borrower approved for the mortgage. Brokers have access to multiple lenders, which gives you a good idea of how multiple lenders will qualify you, and that gives you more flexibility.
Hence, a mortgage broker performs a go-between between a financial institution that offers secured financing and individuals who are interested to take a mortgage for purchasing real estate
Using a private mortgage to purchase a home can seem attractive for home buyers because there are several pros of private financing:
|Loan term||1 year||1-5 years|
|Monthly payments||Interest only||Principal + interest|
|Documentation||Lesser documentation (mostly a property appraisal)||Significant + property appraisal|
|Credit score||No minimum credit score required||The credit score must be 620+|
|What % of the home value I can get?||Up to 90% of the home value||
Based on the stress test.
|Processing and approval time||Might be between 48 hours||Typically 1-2 weeks|
|Interest rates||Comparatively high||Low as compared to private mortgage|
Registering the mortgage is common with both.
Choosing a bank can be defined by some good reasons like lower interest rates but do not forget private mortgages can be a saver if you are rejected by banks. A private mortgage can provide several advantages over banks. You can go for a private mortgage for short-tenure mortgages or banks but if you are looking for a quick and minimal documentation process, that can benefit you from private financing only. Sometimes you have to only interest in the monthly payments whereas in the banks you have to principal & interest.
Fast processing can be the reason most people choose private mortgages for bridge loans rather than banks. Then, the most usual reason, having a no or bad credit score can be qualified with private funds whereas banks require a 620+ credit score.
We can highlight one more advantage of private funding: you can get the 90% of the home value whereas banks might help with up to 80% and 75% for refinancing and home equity lines of credit respectively.
It really doesn’t matter whether you are taking a loan from a private mortgage or bank as long as the terms on which the loan is provided are okay and satisfactory.
Though if we talk particularly about it, a private mortgage uses the home as collateral, so it’s relatively secure. Even though you are borrowing money, you might need to have some insecurities about any legal issues or terms and conditions. You can hire experienced mortgage brokers to go further, and use their knowledge to get secured credit.
Your credit score defines- Are you able to pay back your money? A high score sends all the right signals and your loan is approved very rapidly, while a low credit score, sometimes referred to as “bad credit,” can keep you from getting approved. When it comes to purchasing a home, a bad credit score generally falls below 620.
So if you approach banks with your bad credit it is more likely that your application will get rejected.
So now what next?
Homebuyers whose applications have been rejected by the bank can contact their brokers and easily apply for a private mortgage. Get approved with a hassle-free process and in much less time. Private mortgages place much more attention on the property they are investing in rather than the borrower. They set their own criteria and do not follow the regulations set by the Bank of Canada.
In most cases, interest rates are 100% negotiable.
Mortgage brokers negotiate on your behalf with the lender.
As mortgage rates can always be adjusted up or down in a variety of different situations, commissions and fees can often be lowered or waived.
You can also buy down your interest rate by paying mortgage discount points.
If you’re ready to start shopping for a home or you want to refinance your current home loan, you’re probably wondering how you’ll find a mortgage broker who’s trustworthy, knowledgeable, and easy to work with so here are some points that you need to be considered:
Alpha Mortgage House Corporation is an independent mortgage broker in Surrey, BC that deals with major lending institutes. We are licensed and satisfying our clients for years with dedicated services. We supported and are dedicated to our clients at each step throughout the process of mortgage.
We provide unbiased advice, just hope that you get the best mortgage plan that fits your needs and benefits you in all ways. You are free to call us anytime and schedule an appointment as per your requirement.