Whether it’s an unexpected move or something you knew was coming, a job loss can cause big financial problems. However, a private mortgage is an excellent way to help homeowners stop a power of sale while they rebuild their finances and credit score or give their finances a break while in between jobs.
Understanding Private Mortgage Lending
Private mortgage loans come from alternative or private lenders. They are classified as C lenders, which is part of how they are different from A lenders or banks. Private lenders can be Mortgage Investment Corporations (MICs), groups known as mortgage syndicates or individuals.
They offer a more streamlined process and more flexible requirements than a traditional credit union or bank.
Traditional lending institutions put an emphasis on a loan applicant’s credit score. This three-digit number is designed to highlight risk. Payment history is a big part of how the formula works. Private lenders take an entirely different approach and place more emphasis on the equity that you’ve built up on property. This part of a house that’s been paid off and mortgage-free is more important than a credit score for these lenders.
The Impact of Job Loss on Credit
Losing a job can put you on a slippery financial slope that can eventually affect your credit. The problem is when someone starts using credit cards and other loans to cover everyday bills and expenses after they’ve lost their position.
Although the numbers can fluctuate slightly, Equifax notes that a poor credit score is anywhere from 300 to 579. A credit utilization rate or debt-to-credit ratio is involved in the calculation. Simply put, this calculation divides the amount of revolving credit that someone is currently using by the total that’s available. Credit cards are included.
Traditional lenders generally want to see this rate at 30% or lower, and using credit for staples and bill payments increases the percentage. Private lenders don’t care.
While you’re looking for a job, there are better solutions than using credit designed for other purposes than covering your expenses.
Benefits of Private Mortgages for Job Seekers
A private mortgage has several excellent benefits for someone looking to get over a temporary financial job loss hump.
Like the following:
- Private lenders can fashion the terms of a private mortgage to an individual’s specific circumstances.
- Someone looking for a job could be facing a power of sale. A second mortgage through an alternative lender provides the money to stop that process. The payments are interest only, and the term is usually one year. It’s a stopgap measure to stop this process, but it also demands an exit strategy to a more traditional loan.
- One of the other benefits of a private mortgage for a job seeker is the fact these alternative loans have flexible application criteria. That’s important when it comes to income because someone looking for a new job might have only contract or freelance work to report. That’s accepted for a private loan application. However, banks and credit unions need T4 slips and employment records.
There’s also a quicker approval process with a private loan. Because there are fewer documentation and administrative hurdles, an alternative loan can be processed much faster than a traditional one.
That kind of faster time frame can make a big difference for somebody looking to correct their employment and money issues.
Strategies for Rebuilding Credit
Rebuilding your credit after losing employment is a logical step after using a private mortgage to help you through the rough spots. Here are a few steps and strategies that can help you accomplish that goal.
Find Mistakes on Your Credit Report
Low credit scores can lead directly to higher interest rates and even being denied for a traditional loan. Although private lenders accept low credit applications, it’s a good idea to have an exit strategy from one of these loans, including building your score back up.
One of the first steps is to check TransUnion and Equifax to see if there are any errors on your credit report. Those can range from everything from wrong addresses to names that are misspelled and inaccurate contact information to incorrect credit limits or account balances.
You might discover identity theft or accounts on your report due to a clerical mistake.
If you find a mistake, gather relevant documents like bank statements to support and document the error.
There are other paths to rebuilding your credit score. For example, TransUnion suggests you pay your bills on time and ensure you’re not using too much of your available credit.
You’ll need a good team working with you after you’ve lost your job. Of course, a good alternative lender is a big part of that fix.
Finding the Right Private Lender
Private lenders are regulated by different legislation from those of their more-traditional counterparts. However, it’s important to know that the candidate you are thinking about using is properly licensed.
Mortgage brokerages, mortgage brokers and agents, as well as administrators, are all governed by this legislative framework–The Mortgage Brokerages, Lenders, and Administrators Act, 2006 (MBLAA).
The Financial Services Regulatory Authority of Ontario (FSRA) handles the licensing, which establishes the laws and guidelines set forth in the Act.
Check on the license of the alternative lender you’re considering here.
Even with licensing, watch for red flags like lenders charging upfront fees before processing your application.
