Private Mortgage Lenders: Pros, Cons, Risks, and Benefits

If traditional lenders have turned down your mortgage application, don’t give up on your dream of home ownership just yet. There are private mortgage lenders who can support your vision and fill the void when it comes to providing the money needed to purchase real estate.

Although a private loan is not the ideal first choice for aspiring homeowners, it is sometimes the only option available to some buyers. In this article, we’ll look at the pros, cons, risks, and benefits of a private mortgage loan.

Highlights

• Private mortgages are a potential alternative for people who are unable to obtain a traditional mortgage from a regulated lending institution.
• Private mortgage lenders charge higher mortgage rates, have limited regulation, and higher fees and conditions than traditional Type A or even B lenders.
• Carefully weigh the pros and cons of working with private mortgage lenders and have a solid plan to repay the loan on time to avoid falling into default and risk losing your property.

What is a Private Mortgage Lender?

Private mortgage lenders are private companies or individuals who lend their own money to their customers. Private lenders are an alternative source of financing for borrowers who cannot obtain traditional loans. This may be due to a bad credit score, irregular income, or difficulty in providing proof of income using traditional documents.

Private mortgage lenders tend to offer shorter term loans, with higher interest rates and fees than traditional banks. However, they can also be more flexible in their lending criteria and be able to provide customized solutions to meet specific borrower needs.

List of private mortgage lenders in Canada

As we have seen, private mortgage lenders can provide another financing option for people who are unable to obtain a traditional mortgage from a bank. When considering using a private mortgage lender, borrowers should pay close attention to interest rates, fees, maximum loan-to-value ratio (LTV), interest-only payment policies, and minimum credit score requirements, in order to find the best deal.

It is essential to carefully review the terms of any private mortgage loan and compare the options of several lenders before making a decision. Also, borrowers should have a plan for paying off the loan in full, as private mortgages in Canada often come with shorter repayment periods and higher monthly payments than traditional mortgages.

Here is a list of private lenders in Ontario and across the country.

Who should consider going with a private mortgage lender?

Private mortgage lenders can be a good option for people who can’t get a traditional mortgage for a variety of reasons:

Bad credit: Private lenders can be more flexible than traditional lenders and be willing to work with borrowers who have bad credit or a history of missed payments.

Self-employed or irregular income: Private lenders may be more understanding of the self-employed or people with irregular income, as they use other criteria such as the potential value of the property.

Need for fast financing: You will get the funds very quickly after applying for a mortgage from a private lender, which can be useful in urgent situations or if you need funds very quickly.

Looking for a short-term loan: Private mortgage lenders often offer short repayment periods, making them a good option for those who need a short-term loan while waiting to receive other funds, such as a bonus, inheritance or proceeds from the sale of a home.

Benefits of Choosing a Private Mortgage Lender

Private mortgage lenders aren’t the ideal option for everyone, but there are potential benefits to consider.

Qualification Criteria: If you have poor credit or have been rejected by traditional lenders due to other factors, such as being self-employed or a new immigrant to Canada, a private mortgage lender may be willing to work with you and offer you more flexible lending criteria.

Fast Approval Process: Private mortgage lenders in Canada may be able to offer faster turnaround times and more personalized service than larger financial institutions.

Disadvantages of Choosing a Private Mortgage Lender

Although private mortgages may be a viable option for some borrowers, there are many potential downsides to consider. Here are a few :

Higher mortgage rates: The main disadvantage of private mortgages is their interest rate. Typically, these rates are much higher than traditional lenders (two or three times higher), which can lead to higher monthly payments and be more expensive in the long run.

Lack of regulation: Private mortgage lenders are not regulated by the federal government, which means that borrowers have no protection when obtaining a private mortgage in Canada.

Additional Fees: Private lenders may charge additional fees, such as brokerage fees, legal fees, and appraisal fees, which can increase the total cost of the loan.

Very short duration: The amortization period of a conventional mortgage loan is 25 to 30 years, while the amortization period of a private mortgage loan is rather 3 to 5 years.

Possibility of losing property: Private mortgage lenders may be quicker to foreclose on property if the borrower is unable to make payments, which may result in the loss of the property.

Private mortgage lenders and lenders A

Private mortgage lenders and A-lenders (traditional banks, credit unions and other financial institutions) differ in several respects.

A-lenders generally have stricter qualification criteria, including a minimum credit score and a regular income history, while private lenders may be more flexible in their requirements, allowing lower credit scores, income of self-employment or other non-traditional sources of income.

Mainstream lenders generally offer lower mortgage rates than private lenders due to their access to larger pools of money and economies of scale.

Private lenders often charge higher fees, including appraisal fees, legal fees, and other closing costs, and may require stricter terms, such as shorter repayment terms, larger down payments. higher or more frequent payments.

Private mortgage lenders are not subject to strict regulation, unlike A-lenders, which offers borrowers less protection and transparency.

Private Mortgage Lenders and Lenders B

Private mortgage lenders and B lenders (such as mortgage finance companies (MFCs)) are both alternative sources of financing for borrowers who do not qualify for a mortgage from a traditional A lender. . However, there are differences between the two:

B lenders are considered less risky because they are quasi-regulated and have stricter lending guidelines than private mortgage lenders.

If mortgage interest rates from B lenders are higher than those from A lenders, they are generally lower than those from private mortgage lenders.

Private mortgage lenders generally charge higher fees than B lenders.

Private mortgage lenders are more likely to provide financing with a higher loan-to-value ratio than B lenders.

Frequently Asked Questions (FAQ)

Here are some frequently asked questions about private mortgage lenders in Canada.

Conclusion

In summary, traditional lenders are better suited for borrowers with strong credit and financial profile, while private lenders are a better option for borrowers with weaker credit or unique financial circumstances, but at a cost. higher.

To learn more about getting a mortgage in Canada, contact one of our mortgage experts today.