Buying a home is a lengthy and complex process, as everyone involved in the housing market can tell you. One of the biggest steps, applying for a mortgage, has a ton of considerations. Buyers need to take rates, mortgage types, and lenders into account when deciding what might work best for them. The type of lender you choose will have a big impact on your ability to qualify for a mortgage as well. Your finances, property type, and timeline will determine what lender might suit your needs. While many buyers automatically think of traditional lenders and banks for their mortgage needs, there’s another option worth considering. These, of course, are private mortgage lenders.
What is a private mortgage lender?
First of all, how are private mortgage lenders any different from traditional lenders? A private lender’s funds for mortgage loans have different sources than banks. Investors fund these lenders, with the idea being investors get a return on their investment from the interest rates private lenders charge. Banks, on the other hand, are not funded by any private investors.
As mortgage lending rules have become more strict in recent years, private lenders have become more popular among many Canadians. The rise of entrepreneurship, self-employed workers, or other non-traditional forms of income have resulted in a good chunk of the population needing an alternative source of lending.
When should you consider a private lender?
There are several reasons a person might choose to go with a private lender for their mortgage needs. For the most part, people who work with private mortgage lenders do so because they require a service not offered by banks or traditional lenders.
One of the most common reasons to pursue a private mortgage is because of an issue with credit scores or debt. Banks have much stricter regulations in terms of acceptable credit scores and debt-to-income ratios, whereas private lenders tend to be more flexible and forgiving. The other reason people need a private mortgage is because they are self-employed, or they can’t prove their income through T4s. Some borrowers also require more flexibility with payment options, or want to purchase a property like a fixer-upper. Banks tend to be more wary of lending for properties in need of serious repairs than private lenders.
Pros of private mortgage lenders
Private mortgage lenders definitely offer certain advantages over banks that make them desirable options for many borrowers. The application and qualification process is usually much shorter with private lenders, often as little as two to five days. This takes away the waiting game and shortens the entire process for someone to become a homeowner. It’s also much easier for people to qualify for these private loans in general. Since private lenders design their services to be more lenient and open, it’s much more likely you can secure a private loan if you have any kind of debt or credit issues.
Are you thinking about buying a fixer-upper? A private mortgage might be the way to go. Banks won’t finance a mortgage for more than the value of a home, and fixer-uppers usually aren’t worth much before their repairs. This means you likely won’t be able to secure a traditional mortgage for the amount you need for this type of home. However, private lenders often finance fixer-uppers. If this is the property type you’re after, a private lender could be your best path.
Cons of private mortgage lenders
It’s important to remember private mortgage lenders have their own drawbacks as well. Most notably are the high interest rates that accompany these types of loans. Private mortgages are often riskier investments, due to the odds of borrowers having credit or debt issues. Given these risks, private mortgages also come with higher interest rates to protect the lender and investors. Interest rates can reach as high as 18% depending on the borrower’s situation.
Private mortgages are also meant to be a short-term solution. Most of these mortgages are for one to three years, which can be tricky for many borrowers to work with and pay back. Finally, private lenders require down payments of at least 20% before they will grant a private loan. Sometimes, this amount can be as high as 35-50% down. People who are struggling with saving for a down payment won’t find many advantages with a private mortgage.
Ask a broker
It’s true that private and traditional lenders can both be great options for borrowers looking to become homeowners. However, it’s important to remember lenders work for their own best interests and will always try to sway potential borrowers. Using the help of an unbiased mortgage broker will ensure you know which type of lender might be best for you. Brokers can walk you through rates, timelines, and your own situation to see what you might qualify for, and they can connect you with suitable lenders.