Most homeowners in Toronto have their mortgages with one of the major banks. However, the approval criteria at these banks can be very strict, particularly regarding credit score requirements. The major banks in Toronto typically refuse to provide bad-credit mortgages.
Alternative mortgage lenders exist to provide mortgages that the major banks reject. These alternative lenders charge higher rates and fees than most banks but can approve mortgage requests more easily. Trust companies and credit unions typically have some minimum credit score requirements. Private mortgage lenders can approve mortgage requests regardless of credit score. The team at Mortgage Broker Store is one example of a Toronto-based private mortgage lender.
Lending Options for Bad Credit Mortgages in Toronto
Many Toronto homeowners or borrowers are looking to finance home purchases. Existing homeowners are also looking at the option of taking out home equity for different second mortgage types. In the Toronto area, different lending options exist that go beyond banks.
- A Lenders– Banks are representative of A lenders. Banks tend to lend out predominately long-term amortized mortgage options and demand very strict criteria to obtain mortgage financing. These lenders routinely put borrowers through mortgage stress tests that require exemplary credit and a substantial and easily proven yearly-based salary. Lenders may not consider individuals with less-than-perfect credit scores or non-traditional employment such as contracts or self-employment.
- B Lenders– B lenders are represented by credit unions and trust companies. These lenders may offer some leniency compared to banks, yet they still require strong credit (typically at least 550) and substantial household income.
- C Lenders– There are mortgage brokers available who specialize in private mortgage lending options as well as individual and groups of private lenders. Private mortgage loans can be an option for a borrower/homeowner who may have damaged credit or may require short-term and quickly negotiated mortgage financing. C lenders will assess other criteria and will be able to overlook credit issues.
What You Can Do to Prepare for a Private Mortgage Loan
Credit issues will not be a barrier to obtaining private mortgage financing. However, it is always advisable to be prepared before meeting with a private lender. Gathering all relevant paperwork and researching the market is all part of your homework. Preparation before borrowing helps ensure you’re in the best possible position for loan approval.
- Pull a recent credit report from one of Canada’s two major credit reporting agencies, Equifax or Transunion. Study it carefully and look at the areas that need improving
- Always pay your credit cards on time and in full if possible
- Pay down debt as best you can
- Have a recent appraisal of your property
- Increase monthly income if necessary
- Save for a larger down payment
What Do Private Lenders Require for Private Mortgage Financing?
Unlike all other types of lenders, private mortgage lenders usually only consider the value of the property and the requested mortgage amounts. This contrasts with other lenders looking at credit scores, income, and employment.
While private lenders can provide mortgages to buy homes, this is rare. Most private lenders require a minimum 25% down payment on a purchase and charge monthly payments roughly double those from other lenders. Since private mortgages are not affordable in the long term, most borrowers are advised to use them to address short-term needs. Most borrowers will plan to repay their private mortgage within a year by either transferring to a low-cost lender or selling the property.
If a Toronto homeowner is seeking private mortgage financing in the form of a second mortgage, a private lender will focus primarily on the degree of equity in the property as well as its appraised value. Regardless of the type of second mortgage request, a private lender will assess what is referred to as the Loan-To-Value (LTV). An LTV of 75% is the standard when negotiating second mortgage loans (representing lending up to 75% of the home’s appraised value).
Interest rates associated with private mortgage loans tend to be between 8% and 12%. Private lenders prioritize different criteria and can provide loans despite damaged credit, albeit at higher rates than banks. All associated lending fees will range between 3% and 6% of the total loan cost. Depending on the needs of the borrower/homeowner, private mortgage options can include:
- Home equity loans
- Home Equity Lines of Credit (HELOC)
- Home Renovation Loans
- Bridge financing
- Debt consolidation loans
- Renegotiated terms on a principal (first mortgage)
Mortgage Broker Store Can Help with Bad Credit Mortgages in Toronto
At Mortgage Broker Store, we have access to a broad network of experienced and well-established private lenders in the Toronto area. We’ll sit down with you to advise on the best loan option tailored to your unique financial needs.
Mortgage Broker Store advises on leveraging equity for property purchases or debt consolidation. Don’t let credit issues prevent you from taking advantage of a robust Toronto real estate market.