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Different Types of Hard Money Loans Explained

Different Types of Hard Money Loans Explained in Ontario

According to the June Toronto Housing Report, throughout 2020 and through the first quarter of 2021, property values have risen considerably throughout Toronto and the GTA. 

The price of a single detached property has now increased to $1.1 million. In spring 2021, houses continue to be snapped up quickly. It now takes an average of only 13 days on the market to sell, often well above the asking price with multiple bid offers.

In Ontario, there are different types of mortgage loans available for those seeking mortgage financing. There are also varying types of lending opportunities depending on a homeowner’s/borrower’s financial circumstances. There is no question that the housing sector is flourishing. This housing trend is encouraging the borrowing of mortgage financing for various mortgage objectives. 

Mortgage financing to help solve a need to upgrade or address long-term renovations, the immediate need to consolidate multiple monthly debt payments, provide financial help to offspring, or even cover legal costs and arrears if a mortgage were to fall in default.

What are Hard Money Loans and Who Provides them in Ontario?

Regardless of why an Ontario homeowner/borrower requires a secure mortgage loan, there remain choices pertaining to what loans are on offer. There are also choices to make in terms of what lenders to negotiate mortgage financing.

The term hard money loans is another term for private loans. These loans are provided by well-established and experienced Ontario-based private lenders who may lend out hard money loans on an individual basis or as part of a group of private lenders. There also exist mortgage brokers who specialize in negotiating the terms of hard money loans. Hard money loans share some common characteristics in that they are typically negotiated:

  • More quickly than the banks can process and approve mortgage financing
  • Tend to be short-term in length (typically 1-3 years)
  • Are based on the appraised value of your home 
  • Utilize existing equity to calculate private mortgage terms
  • Are calculated using other criteria beyond credit scores, traditional yearly income, and household debt ratio.

When Will Hard Money Loans be a Good Option?

Hard money loans are great options for those homeowners that may be facing credit issues. It may also provide quick and easily negotiated mortgage financing for those that are self-employed, contract-based, or rely on freelance income. 

The banks will demand exemplary credit, a credit score of at least 650, and will prefer easy-to-prove yearly income. A private lender, on the other hand, will be able to use a wider scope of criteria to base loan calculations on, namely Loan-to-Value, degree of equity in your home, any additional financial assets while taking into consideration all sources of monthly income.

If a homeowner is facing outstanding debts, may need funds quickly for immediate renovations, or does not pass the stringent criteria imposed by the banks for mortgage financing, hard money loans can be a very good short-term solution.

An Explanation of Hard Money Loan Options

Just as there are different reasons to negotiate private mortgage financing, there are also different types of hard money loan options.

  • Home Equity Line of Credit (HELOC)– A HELOC is structured as a revolving line of credit using the equity in your home. Funds become available once the balance is paid off and the homeowner must pay only the monthly interest on the balance of the loan. The degree of equity available to the homeowner is contingent on the calculated Loan-to-Value (LTV) and the degree of equity against the balance owing on the mortgage. A private lender will lend up to 75% LTV and need to see at least 25% equity to negotiate a HELOC.
  • Home Equity Loan- A home equity loan is a second mortgage that is calculated utilizing the equity in your home. It can be used for any number of purposes including paying off liabilities, using the funds for immediate financial needs such as home fix-ups. Just as a HELOC is based on LTV, degree of equity, and your home’s appraised value, so too is a home equity loan.
  • Home Renovation Loans– Just as the name of the loan suggests, a home renovation loan is a type of second mortgage leveraged against your property using the same calculations of overall LTV (75% for most private lenders), degree of the existing equity in your home and your home’s appraised value. This type of hard money loan is used to pay for any home renovation costs and home repairs.
  • Bridge Financing- Bridge financing provides a bridge between selling your home and closing on a new tapping into existing equity. Bridge financing can also be used for other reasons including paying off debts or paying for house repairs and other expenditures that may be pressing. A bridge loan is calculated using the same criteria as the other types of private mortgage loans.
  • Negotiating new terms on your principal loan- If meeting the monthly mortgage payments on the principal (or first mortgage) becomes difficult there is a danger of falling into mortgage arrears. It may also be difficult to pay for multiple monthly debt payments in addition to all associated housing costs. A private lender can use the equity in your home using the same LTV calculations and assessing the appraised value to help change the terms of your mortgage or provide financing to help pay your monthly mortgage payments reliably. To calculate this type of mortgage, home equity will be factored into the equation.
  • Debt Consolidation LoansDebt consolidation loans can provide much-needed additional mortgage financing to merge all monthly debt payments into one debt payment. Lenders will assess existing equity in your home, the appraised value of your property, and calculate the overall LTV. This private mortgage loan option will help a homeowner reliably cover housing costs while covering debt payments.

Mortgage Broker Store Can Direct You in Your Search for Private Mortgage Financing

Mortgage Broker Store can help connect you to an appropriate private lender to meet your mortgage needs. We are also in the position to lend out private mortgage financing based on your overall financial picture. Mortgage Broker Store understands the concerns of the Ontario homeowner. We are continually striving towards finding the best match when looking at your particular mortgage and financing needs. 

We work with a network of private lenders across the GTA and are more than happy to guide you in important decisions that you will be making during the lending process. To obtain a bad mortgage loan, feel free to contact us at your convenience. We will steer you in the right direction in your mortgage search.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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