Private Lender Mortgage – What you need to know

Private Lenders ottawa

A private lender mortgage may be an option if you are finding it challenging to get a mortgage from a traditional lender such as a bank or credit union. It is important to know the various pros and cons associated with private mortgages.

People typically explore a private lender mortgage because they are finding challenges in obtaining financing from a traditional bank. The reasons for this can vary from client to client.

Some example reasons would be having bad credit or already having your debt servicing ratios above traditional lender guidelines due to owning multiple rental properties.

Learn more: Bad credit mortgage

 

Contact me today to to review private lender mortgage options

 

Let’s look at what private mortgages are, the type of mortgages that private lenders offer and what are some of the benefits and downsides to these mortgages.

 

What is a private mortgage?

A private mortgage is the mortgage that is not lent by a bank or traditional lender. The mortgage usually comes from a business or an individual. If from a business, typically the business has a collection of funds that is lent for private mortgages. Private lenders typically focus on providing financing for the short term.

There are three main types of private mortgages that private lenders offer. They are:

 

Bridge loan

A bridge loan is a short term loan that is typically needed when you have bought a new home before selling your existing home. Traditional bridge loan needs to have a firm sale and purchase agreement on the purchase and the sale. Without that traditional bridge loan is not possible.

You can however explore a private mortgage for a bridge loan. These mortgages are typically interest only and you can pay them back once your existing property sells.

These loans come at a higher interest rate however even with a traditional bank, the interest rate on a bridge loan is higher than the interest rate on a regular mortgage. This may not be as much of a concern however as you are borrowing the funds for a small amount of time. Sometimes even for just a few days. When deciding if you should go this route, you can weigh the pros and cons of having the bridge loan versus getting the closing dates to align if possible.

 

Bad credit mortgage

If you have bad credit from having debts in collections, failing to pay your financial obligations on time and so on, a bad credit mortgage may be the option for you.

These type of mortgages can be used for the consolidation. Also, just to help provide some financial breathing room.

Learn more: How to build your credit score
Learn more: Bad credit mortgage

Traditional lenders and banks have minimum credit score requirements. If you do not meet these requirements,  then if still wanting financing, bad credit lender can assist. These loans come with higher interest rates due to the increased risk to the lender.

 

Second mortgage

A second mortgage is a mortgage that goes into second position behind a current mortgage you have. Second mortgages are sought for a variety of reasons such as financing a vehicle or your kids tuition. Also, borrowing equity to invest or buying a rental property and so on.

 

What are the benefits of a private mortgage?

A private lender mortgage is it worth reviewing if you are flipping a house and only need money for the short term. Also, if you have bad credit and feel some additional funds will help you get on the right track. For example, improving your credit score and paying off higher interest rate debts first.

Some other benefits include:

  • Faster turnaround time: Second mortgages typically can be advanced in as little as 48 hours. When you cannot wait for a traditional lender review and approval, a private mortgage may be the way to go.
  • Bad credit assistance: If your credit score is below traditional lending guidelines however you are still in need of money. A private mortgage may help you get through these times.
  • A unique loan: Your reason for your financing may be quite specialized. With that, it may not be within a lender’s guidelines. Private mortgages can to help with the outside of the box lending. For example, it may be hard to secure a loan against an expensive personal item however you could get a private mortgage to finance the item.

 

What are the risks?

Although there are some possible benefits to private mortgages, there are also potential risks with these mortgages.

Some rest can be:

  • Higher interest rate. Typically private mortgages come with higher interest rates as well as the lender fees.
  • Shorter terms: As these mortgages are sometimes with one year terms, you may need to re-qualify at the end of the year or pay another lender fee.
  • Less ability to pay the mortgage off faster: If you are borrowing the money for a one year term, for example, if you have the ability to pay it off sooner some lenders do not have the option. Or,  they would charge a penalty to do so.

 

How to find a private lender?

Starting with a mortgage broker is your best bet to get connected with the right private lender for your needs. Plus the mortgage broker has access to many private lenders and can help you compare rates and terms and options.

Researching online is also a great option. From this, you can see reviews and more.

 

Is a private mortgage right for me?

Doing the proper homework up front such as researching lenders, the fees, rates and terms as well as reviewing a sample contract from a private lender will help you in deciding if a private lender mortgage is the right fit for you.

If the pros of the private mortgage outweigh the cons, then this may be something to help you meet your current financial needs.

Also, if the timing is not right to get a mortgage with a traditional bank but you feel that a private lender is not the right fit, there is the option to wait until your finances improve and you can try again with a traditional lender in the future.