Deciding on a mortgage lender is one of the most important decisions you’ll make during the home buying process. Your mortgage terms and your relationship with your lender are long-term commitments, so you want to choose wisely. For those with unique situations or who are seeking more personalized service, using a private lender may be a great option!
Private Mortgage Lenders
Private mortgage lenders are individuals or entities that will help homebuyers finance a home. They emerged as a response to traditional institutions, like banks, who often have strict criteria surrounding who gets approved for a mortgage. Traditional institutions often discount buyers with unique or less than optimal situations. As a result, private lenders are willing to take on buyers who may be unable to get traditional approval. Instead of looking strictly at financial health, private lenders will consider the value of your property, your properties condition and location, your income, and the size of your down payment.
Are there limits?
Private lenders have more discretion in who they lend to based on their own review criteria. Generally speaking, private mortgage lenders will consider your current mortgage position when deciding upon the amount to loan you. If this is your primary loan, you may be able to secure up to 80% of your home’s current value. For second mortgages, private lenders will typically loan up to 65% of your home’s value as they are often more comfortable with more equity remaining in the home.
In addition, private mortgages tend to be much shorter than traditional mortgages and typically have a term of six months to three years. Private mortgages tend to be used as short term solutions to help re-establish credit, or provide quick access to funds, and often come with higher interest rates than traditional mortgages.
Who Should Use a Private Lender?
Private lenders are a great option for any type of buyer. That being said, they typically appeal to those who:
– Have a non-traditional source of income, i.e. self-employed
– Are interested in buying a non-traditional property
– Have a poor credit score
– Are looking for a short-term loan
– Want a lender that can meet their individual needs and offer a personalized solution
– Require more flexible payment options
– Require financing quickly and don’t want to risk being rejected by a traditional institution
– Want a short-term solution so they can save up a larger down payment or improve their credit score
With a private mortgage, you are not required to repay the principal. You will only be responsible for making interest payments, which will typically reduce your monthly financial obligations when compared to a traditional mortgage.
There are a few options for structuring your repayments. You can pay a monthly interest sum, an up-front payment covering all of the interest fees, or you can defer all interest payments until the end of the term. Depending on your situation, this repayment flexibility allows you to choose an option that best suits your current needs.
Types of Private Lenders
There are three main types of private lenders: Individuals, Syndicate Investors and Mortgage Investment Corporations.
Individual lenders can be family, friends, co-workers or anyone willing to help you finance your home.
Syndicate investors are a group of investors who will pool their personal funds for one mortgage.
Mortgage Investment Corporations (MIC)
Similar to syndicate investors, MICs are a group of investors who will pool their personal funds to invest in multiple mortgages.
When you begin searching for a mortgage, private mortgage lenders might need to be considered depending on your financial situation. Therefore, a private lender may be able to provide a more customized solution, compared to that of traditional institutions. If this sounds like the right path for you, contact your mortgage broker to help you get started. They will be able to connect you with a variety of private mortgage lenders to find one that meets your needs.