The evolving world of mortgage finance is characterized by changing rules for credit unions, banks, and other mortgage lenders. In recent years, mainstream financial institutions such as banks have slowed down their lending regulations or tightened their underwriting processes. That means some borrowers’ mortgage applications get declined. This is the primary reason many Canadians are turning to private mortgage lenders where lending regulations are flexible.
What’s a private mortgage lender?
Also known as an alternative lender, private mortgage lenders are a financial entity or a person who works independently of provincially or federally regulated financial institutions such as trust companies, credit unions, and banks. The lender can offer mortgages and other types of loans to Canadians who, for some reason, are not eligible for a similar mortgage from mainstream financial institutions like banks.
Private mortgage lenders offer different types of loans, including home equity loans, first mortgages, hard money loans, bad credit mortgages, and second mortgages.
These lenders work with most mortgage brokers to connect with borrowers and potential clients. Suppose you are looking for a mortgage, but banks have turned you away, or you are unsure of how to start. In that case, it is recommended to consult with a reputable mortgage broker who can help you explore the different types of mortgages available. Mortgage brokers can also help you understand the interest rates you may be eligible for and the specific type of lender that can meet your credit needs.
Mortgage brokers can give insightful information about the specific requirements you must need to get approved for a loan by private mortgage lenders. They also help borrowers gather all the necessary paperwork they should provide. While alternative lenders may not be required to follow some federally enforced standards about the people they can or can’t lend money to, these lenders still have their own standards.
Why should you use private mortgage lenders?
You may use private mortgage lenders under any of the following conditions:
- You require fast finances and do not want to wait for the lengthy mortgage approval process associated with the banks.
- You plan to buy an unconventional property that banks will not be willing to finance.
- You have a bad credit score which means banks cannot approve your mortgage application.
- You need a short-term loan.
- Your income is non-confirmable, and this could prevent you from acquiring a traditional mortgage.
Financial lenders use your financial history and credit score to assess your creditworthiness. That means these institutions can approve or decline your mortgage application based on your credit report. If you are not eligible for a mortgage, it is recommended to build your credit score before you can apply for a mortgage.
You can achieve this by making sure you have a low credit utilization rate, pay your bills on time, create a long-standing credit history, and have a low or zero balance on your credit cards. Alternatively, you can send your mortgage application to private mortgage lenders.
Private mortgage lenders vs. banks
Generally, private mortgage lenders are an excellent option for people denied loans by the traditional A-lenders such as the National Bank, RBCE, TD, CIBC, BMO, and other big banks in Canada. Other lenders classified as A-lenders include credit unions and chartered banks. These are federally regulated financial institutions and are required to perform a mortgage stress test to assess or determine if a borrower’s ability to make timely payments even when interest rates increase.
If a borrower fails the mortgage stress test, the lender can’t offer you credit services even you meet all other criteria. On the other hand, private lenders are not legally required to perform mortgage stress tests and can offer other options if you failed that test.
The short-term nature of private mortgages bridges the gap for people with temporary financial issues. Suppose you recently incurred unexpected expenses, divorced, or lost a job. In that case, a private mortgage lender can offer you a financial solution until your financial situation improves.
These institutions can also provide bridge loans as you try to secure long-term financing, like financing the down payment on a property you intend to purchase while you wait for the sale of your current house. Also, you can you such short-term financing options to fund property renovations (and eventually increase its value). The quick turnaround time of alternative lenders offers you access to a fast financing option because some lenders offer same-day credit application approvals.
Alternative lenders vs. B-lenders
Mortgage Finance Companies and other B-lenders are quasi-regulated lenders not directly regulated provincially or federally. However, they follow the relevant regulations due to the unique nature of their business. B-lenders and private mortgage lenders are not allowed to conduct mortgage stress tests and often have looser lending rules compared to A-lenders like bankers.
B-lenders are large financial companies that deal with uninsured mortgages. That means the loan-to-value ratio is likely to be higher than 80 percent, particularly if you made a down payment of 20 percent of the property value. Note that institutions such as CMHC mortgage insurance have specific conditions such as purchase price limit, minimum credit score, and amortization period limit. Sagen and Canada Guaranty are better alternatives for borrowers who don’t qualify for a mortgage from B-lenders.
Private mortgage lenders fees
As mentioned earlier, private mortgage lenders are not subject to provincial or federal regulations in Canada. That means they can set their own fees and other lending requirements. Some private mortgage lenders can charge certain fees, and others can charge much higher fees or lower fees. For example, a private lender can charge 7% and no fees while another institution may charge 6%, which might later turn into an effective yearly rate of 9% after fees.
Generally, comparing private mortgage lenders based on rates only may not include all the costs of acquiring a private mortgage. This can affect the total cost of your loan. Some of the fees that can be charged beyond the mortgage rates include brokerage fees, appraisal fees, legal fees, and private lending fees. Also, there may be setup fees and administration fees as well. Keep in mind that the fees charged vary depending on the type of property and its location.