A private mortgage is basically an interest-only, short-term loan which typically ranges in length between one and three years. Since it’s an interest-only loan, it means Ontario homeowners don’t have to pay the mortgage principal, but are required to pay the monthly interest. Many private loan lenders are more concerned about the overall value of the property and the borrower’s ability to pay back the loan rather than their credit history.
When To Use a Private Loan Lender
A private loan lender is often a good choice for those who want to buy unconventional property which a bank or prime lender is hesitant to back. It’s also a good option if you need quick financing for a home, if you’re searching for a short-term loan, and/or if you’re finding it hard to acquire a traditional mortgage due to a bad credit score or history. In addition, a private mortgage can be ideal if you’ve been turned down for financing because you can’t confirm your income.
Private mortgages are typically funded by individuals, syndicates or groups, and mortgage investment corporations. Homebuyers should be aware that the interest rates are typically higher than traditional mortgages and may want to use a private lender as their last option. In addition, borrowers will likely encounter mortgage and broker fees. The interest payments on the loan are due each month over the term of the loan and the principal is then due at the end of the loan term.
For instance, if you borrow $200,000 over a two-year period you will need to pay the monthly interest only for 24 months and then the principal sum of $200,000 at the conclusion of the loan. The interest rates are higher since the lender is taking a bigger risk by often loaning money to those with lower credit scores, or unverifiable income. Depending on the current market, the borrower’s situation, and the property involved, the interest rates on private mortgages could be between 8 and 18 percent.
Fees For Private Loans
When acquiring a traditional mortgage, the lender pays a commission to the broker, but with a private mortgage, the borrower takes care of the broker’s fee. Also, there are set-up fees involved and the total can sometimes represent between one and three percent of the loan amount. The mortgage fees can be financed via the mortgage loan, though. For example, if you borrow $200,000 and the fees total $6,000 you can apply for a loan of $206,000, otherwise, they will be taken from the proceeds, and you will be advanced what remains.
Private lenders can usually be found for both residential and commercial real estate purchases, but many lenders prefer dealing in urban areas since the real estate value is often higher and safer, like in Toronto, for example. You may also find that some lenders prefer to deal within their local region as this allows them to evaluate the property more easily. Many private mortgages can be approved within a week or less and the funds are typically available within two or three weeks.
The Private Loan Approval Process
Since there’s usually a higher risk involved for private lenders, they will take a close look at the type and value of the property involved in the mortgage. The property will be appraised to make sure it’s in good condition. If you default on the loan for some reason, the lender will need to know that the property is worth well beyond the amount of the loan. Homebuyers with confirmable incomes usually receive a lower interest rate since they can prove their income via pay stubs, tax returns and notice of assessments. If your income is non-confirmable because you work for commission or are self-employed, the lender will usually have to estimate your income based on the industry average and your tax returns.
If you’re seeking a private mortgage to purchase a home, the maximum loan-to-value ratio for the property is typically 85 per cent. This means you’d need to have a down payment of at least 15 percent. If you have a higher down payment or equity available in your home, it means you have more at stake since you’ve invested more in the property and this makes you a better risk for the lender. If the loan is for refinancing, you may also be able to borrow as much as 85 percent in loan-to-value, depending on the lender.
Homeowners who already have a collateral mortgage deal with a conventional lender may find it hard to refinance their property or receive a second mortgage since their equity is tied up and spoken for. This isn’t the end of the world though since a good mortgage firm can help to connect you with the right private lender. At MortgageMeister.com, we’ll help locate the lowest rate and best possible mortgage product to suit your financial needs. We can help you in numerous situations such as purchasing, refinancing, equity loans, bad-credit financing, construction loans, and commercial loans etc.
Our mortgage specialists will be glad to guide you through the process from start to finish and take care of all the legwork. At MortgageMeister.com we’ll discuss your options based on your unique situation. Please feel free to contact us at your convenience regarding any mortgage-related issues.