Private mortgages

Photo: Voyager ix ​

Last resort?

Do you think of private mortgages as a last resort? The very last option to consider should you be unable to obtain mortgage financing through a traditional lender? 

That is the popular opinion, but private lenders have been filling the void left by our tighter lending rules. There are several opportunities when you might consider private financing. Funds are available for first, second, or even third mortgages.

Private lenders are different

Private lenders are different from banks or other mortgage lenders, with the primary difference being the source of funding. Private lenders get their funds through individual investors or groups of investors, and they are considered a short-term investment. This is why private financing is usually only available for one to two year terms, with the expectation that the borrower will be able to pay off the mortgage at the end of the term.

Unlike traditional financing, a private mortgage lender is more concerned with the property, as this is the security they will have should there be a default in payments by the borrower. The primary concerns are the condition of the property, location, the borrower’s equity in the property, and how easy it would be to sell if the borrower gets into trouble. That is why it is difficult to find private mortgage options for rural or unusual properties.

Tightening of CMHC rules

Another reason that private lending is becoming more popular is the tightening of CMHC rules for self-employed and commission income borrowers. Self-employed borrowers with more than three years in business and those who have commission based earnings are now required to provide traditional proof of income to qualify for a mortgage. If you aren’t showing a reasonable income for your profession, then there could be a challenge in obtaining financing from institutional lenders.

Real estate investors

One sector of the market where we are seeing an increase in this type of mortgage is with real estate investors. Some property investors are getting tired of dealing with the bank’s restrictive lending policies, and are opting to go to private lenders regardless of the higher costs.

Real estate investors now know there is a requirement for a minimum 20% down payment on non-owner occupied investment property purchases. CMHC also changed its underwriting policy for qualifying, and reduced the amount of rental income they will allow for qualifying. The demand for private financing has increased for smaller investment properties used to generate rental income, as they may no longer fit within the banks standard guidelines.

Consolidating debt

You may need to consolidate debt to improve your credit score so you can qualify for a mortgage at a prime lender in the future. A private second mortgage can be a good way to consolidate debt, and although the rates are higher than a first mortgage, the rates are still often lower than high interest credit cards, car loan payments, or even unsecured lines of credit. If your credit score is high, most likely the rate will be lower. Also, the more equity you have in your property, the higher your chance of getting approved for a second private mortgage. 

Have you been turned down by your bank? 

You might also consider a private mortgage option as a temporary solution until you repair your credit or fix the reason you were declined at a prime lender. Just know that there are options available beyond traditional lenders. It is a growing segment of the mortgage market, providing alternate solutions for mortgage financing.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.