Before you can understand how private lenders break down the fees for their services, it’s good to have an overview. These individuals and/or financial companies are also called alternative lenders. They can help you finance or sell quickly.
One of the big differences between them and more traditional places like banks and credit unions is how they work. Private lenders tend to operate independently from more regulated financial institutions like trust companies, credit unions and banks.
Comparing the two options means digging deeper and realizing that a bank is more regulated than a private lender.
There’s more. You’re more than likely to pay a higher interest rate with an alternative lender than a more traditional one. The reason is simple. These private lenders are taking on a bigger risk. Applicants that they evaluate often have damaged credit scores. Some are even facing evictions through a power of sale or foreclosure.
Understanding the different types of loans and mortgages available can help you make the right decision.
What Types of Products Do Private Lenders Offer?
Once the process works through to the private lender, you’ll have several different products. The options include:
- Hard Money Loans- Basically, this is an American term for private lending in Canada. The application process is more straightforward with these alternative hard money loans. However, applicants should expect to pay higher interest rates.
- Home Equity Loans– This is a second mortgage that’s calculated based on the amount of equity you have in your home. The money gets paid out in a lump sum, and your house is used as collateral. With all the paperwork, you can get the money fast.
- Bad Credit Mortgages- For many homeowners, the last several years have been volatile. Some struggled through the pandemic only to find inflation, causing higher interest rates and strained budgets. Unfortunately, the credit rating for these individuals and others can suffer. Generally, Equifax sees credit scores ranging from 580 to 620 as subprime. Lower scores pose challenges in securing approval from traditional lenders. However, private lenders focus on existing equity and the LTV (Loan-to-Value) ratio. Simply put, if a homeowner has a home worth $1,000,000 with a $500,000 first mortgage and is requesting a $250,000 second mortgage, the LTV ratio for the requested mortgage can be up to 75% of the property’s value. All existing mortgages, plus all proposed mortgages, are divided by the appraisal value. A bad credit score plays a lesser role in getting approval.
- Second Mortgages- Private lenders focus on metrics like equity rather than more traditional benchmarks. Property owners with at least 25% of the equity in their own property stand a chance of getting approved for a second mortgage. However, this is the upper limit.
- First Mortgage- A private mortgage usually needs an appraisal or home inspection. However, the whole process is easy to qualify for, and it has a shorter approval process.
Understanding the different products available helps you to have a good idea of your options. Interested applicants understandably want to know the rates they can expect from private lenders and financing for a property.
Here’s What Private Lenders Charge
Private mortgage rates vary due to differing regulations compared to traditional lenders. Nevertheless, a few ballpark figures can provide a rough estimate. This can help if you need to sell a condo fast.
For example, on a first mortgage without another loan already in place, you can expect to pay anywhere from 8% to 15% interest for a condo. The second mortgage rate, when you already have a loan from a bank, can range from 10% to 15% or more. The rates are higher for the same condo, but applicants must remember the process is more streamlined and user-friendly.
You’ll need to know a few other things to get the money fast.
Private lenders usually loan out money on a short-term basis. This can range anywhere from six months to two years. Some private lenders opt to charge what they called, “Lenders Fees” on a cottage.
Administrative and Other Fees
There are several costs involved in putting together a private mortgage. For example, lenders need to pay the people who do the administrative work by drafting paperwork and putting together the property data. They need to pay employees and put some money aside for government agencies. This fee usually runs somewhere between $300 and $650.
Following are a few other costs you might incur with the private mortgage.
- The mortgage termination fee comes at the end of the loan term. It is usually three months’ worth of interest payments and covers related costs.
- Like a more traditional mortgage, there are legal fees that need to be paid out. Depending on how complicated the mortgages these could run anywhere between $1000 and $3000.
- There is also an appraisal fee to consider. The company performing this task needs to be an AACI or CRA accredited by The Appraisal Institute of Canada. The money often totals between $300-$500.
Lender and Broker Fees
These lender fees usually represent a portion of the loan. These are usually 2% to 4% of the entire cost of the loan itself. These help a private mortgage lender set up and discharge the product. The lender fee may be higher for a variety of reasons, including:
- Legal or administrative issues to overcome
- High LTV is requested
- Rural property
- Loan is given rush priority
- The mortgage incorporates custom terms or conditions.
The total must include the mortgage broker fee. These are roughly equal to the lender fee. This means that the total for lender and broker fees will usually range from 4% to 8%. The money goes to pay the administrative staff, agent, and mortgage broker. This team arranges the product.
It includes the Loan-to-Value ratio (LTV) of your existing property. Private lenders will generally go as high as 75% of the LTV value when they are deciding on the amount of the loan. Other criteria include the condition of the property and the local market demand.
Remember, Mortgage Broker Store supplies private mortgages and buys houses for cash in the GTA. There’s no real estate agent to deal with and no commission to pay with us.
Mortgage Broker Store supplies no-obligation offers as quickly as within 24 hours. Call 416-499-2122 or email ron@mortgagebrokerstore.com, and we will get back to you the same business day.
