Owning a home is a dream for many Canadians. However, with the rising prices of real estate, it can be challenging for some to qualify for a mortgage from traditional lenders like TD or RBC. This is where private mortgage lending comes in as an alternative for those who cannot meet the stringent qualifications required by banks and credit unions.
Private mortgage lending allows Canadians to obtain a private mortgage loan to purchase a property. This type of lending is offered by individuals or mortgage investment corporations and usually has less stringent qualification and lending processes. In this blog post, I will explore what private mortgage lending is, how to get a private mortgage, and the risks and benefits associated with this type of lending.
What is Private Mortgage Lending?
Private mortgage is a type of lending where individuals or corporations lend money to borrowers who are unable to obtain a mortgage from traditional lenders. Private lenders typically offer loans for a shorter term, ranging from six months to three years. They also offer loans at a higher interest rate than traditional lenders, which is why private lending is considered a higher-risk investment.
Private lenders assess the risk of lending based on the borrower’s ability to repay the loan, the state of the property being purchased, and the borrower’s creditworthiness. Private lenders may require additional security, such as a second mortgage, to protect their investment.
How to Get a Private Mortgage?
Getting a private mortgage is usually easier than getting a loan from traditional banks or credit unions. However, there are still some requirements that need to be met to qualify for a private mortgage. Here are the three main requirements:
- Proof of Income: You’ll have to provide proof that you have the necessary income to meet the required mortgage payments. Additional documents may be needed for self-employed individuals.
- Down Payment or Loan to Value Ratio: To receive a private mortgage, a down payment of at least 15% is required to be approved or a loan to value ratio should be no greater than 85%.
- State of the Property: If the borrower backs out on the deal or is no longer able to make payments, the state of property will also be taken into consideration. The lender will want to take ownership or even resell the property to regain lost investment.
It is important to note that private mortgage lenders do not follow the same rules and regulations as traditional lenders. Borrowers should be cautious when considering private lending and do their due diligence to ensure they fully understand the terms and conditions of the loan.
Risks and Benefits of Private Mortgage Lending
Like any type of investment, private mortgage lending comes with risks and benefits. The main benefits of private lending are that it offers a faster approval process and more lenient lending requirements compared to traditional lenders. Private lending can also be an opportunity for investors to earn a higher return on investment.
On the other hand, private lending is a higher risk investment than traditional lending. The interest rates on private mortgages are usually higher, which can make the loan more expensive in the long run. Private lenders may also require additional security, such as a second mortgage, which can increase the risk to the borrower.
Private mortgage lending can be a great alternative for Canadians who cannot obtain a mortgage from traditional lenders. However, borrowers should carefully consider the risks and benefits before choosing this option. It is also important to work with experienced real estate lawyers who can help you navigate the complex process of obtaining a private mortgage.
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