How Can I Get a Private Mortgage For Buying a Home?
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.
What is a Private Mortgage?
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.
MORTGAGE STRESS TEST
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.
When To Go For a Private Mortgage?
A private mortgage can be the best solution for multiple borrowers under multiple scenarios:
- When you need to grab equity out of your house and a HELOC ( home equity line of credit ) from your bank is not enough.
- When your application has been rejected by the bank.
- When you are having a poor credit rating and even if you have no credit score.
- Being a self-employed person, when you cannot verify your income.
- You are new to Canada and lack financial background. You can be qualified under other programs designed for first-time home buyers.
- Time-sensitive situations; depending on the scenario, that can drag you to a private mortgage.
How Does Private Mortgage Work?
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
Benefits of A Private Mortgage To The Borrower?
Easy To Qualify
Since the private lender creates its terms and conditions for financing, mortgage brokers can help the borrower to lend on lower credit scores. So, you can get a loan in a lower financial situation with the help of a private mortgage broker.Short Approval Process
You may get to the closing table faster as there may be fewer required documents and processes. The short approval process with private financing can be a good reason to define why people choose this as compared to traditional mortgages.Flexible Process
Unlike traditional methods of financing, private mortgage financing has flexible terms and conditions. An experienced mortgage broker can negotiate for you for better offers and interest rates.Avoid Stress Test
As mentioned above, the stress test announced by Canada’s federal financial regulator creates unusual tension for the borrowers but as the approval process of private mortgages is different so borrowers don’t have to qualify for this test.Debt Consolidation
If you have debts or overdue bills for which you are paying high-interest rates, then a private mortgage can help you merge all of your due balances into one larger amount and with lesser-interest monthly payments by using the available equity in your home. A debt consolidation home equity loan can help you get out of debt rapidly and free up cash flow.Short-Term And Bridge Loans
A private mortgage is significant to use as a short-term loan or bridge loan to keep you afloat until you procure your more permanent financing option. You can also benefit from a private mortgage if you plan to execute a flip and need investment capital fast.Difference Between a Mortgage From a Bank And a Private One?
Here Are Some Key Differences Between The Both:
| CRITERIA | Private mortgage | Banks |
|---|---|---|
| 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.
Is A Private Mortgage A Safe Option?
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.
Can You Get A Private Mortgage at a Low Credit score?
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.
Are Interest Rates Negotiable In Private Financing?
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.
FACTORS TO CONSIDER WHILE CHOOSING A PRIVATE MORTGAGE BROKER
Search For A Broker Who Has Connections With A Number of Enders
: A good broker will have significant multiple sources to select from. Multiple mortgage sources mean the broker has more options in terms of mortgage length, interest rates, and the specific requirements of the loans that will benefit you ultimately.Good Conversation Over The Call
It’s important that you feel comfortable with your broker before the meeting. So it’s good enough to have a conversation with your broker over the call so that you know if it is worth meeting him. Even it can help you to figure out how far your broker can help you.How Long Have They Been In The Mortgage Brokerage Business?
A reputable mortgage broker with some years of experience will be able to leverage their knowledge and skills. They have worked with people in several situations and their experience can better help to understand your needs and will suggest you the best.References of The Broker
Follow through on checking the broker’s references from family and friends. Better get a reference from the person you might have in a similar situation as yours.Up To Date With The Latest Trends
Federal and state governments introduce new programs to help borrowers and investors, hope your mortgage brokers are up-to-date with those trends.If They Ask Good Questions About You
A good mortgage broker would initially get detailed information about your tenure and paying capacity. They would understand what you are looking for instead of offering what they have. So, figure out the interest of the broker and how much interest he has in your needs.They Are Clear About Fees And The Whole Process
When you are thinking about purchasing a mortgage, make sure that your mortgage broker is cleared with his fees. Hope there are not any hidden fees in regard to legal charges or notary charges. Not only fees, but he must also be clear with the process. Each step should be clearly defined.Communication Skills
You’re going to make the biggest purchase in your life, so your broker must have good communication skills at some point. They need to negotiate with a lender for your interest.Licence And Insurance
Before working with a mortgage broker, check and make sure they are licensed and insured. It protects you if anything goes wrong during the whole process.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.
Alpha Mortgage House Corporation is a Mortgage Broker in Surrey, BC. We provide mortgages for Home Purchases, Project financing, Second mortgages, Commercial mortgages, Mortgages for first-time home buyers and more. Alpha Mortgage is a one-stop solution for all your mortgage needs. Our team works with top lenders to provide you with the best financial options.