With some of the greatest increases in housing appreciation in over a decade in Ontario coupled with record-breaking sales numbers throughout 2020 and through the first quarter of 2021, the need for mortgage financing is increasing. Borrowers looking to snap up homes as well as existing homeowners who want to tap into some considerable increases in home equity are exploring lending options.
If your credit is exemplary and your income is easy to calculate by a mortgage lender then the banks will be offering some very competitive borrowing rates at the moment. For those with adequate credit, credit unions and trust companies will provide mortgage options. What if a borrower has poor credit? What lending options are still open to those that can not demonstrate creditworthiness? Private lenders are well established in this Province who will be able to offer secured private mortgage financing when credit is a stumbling block to mortgage financing.
You may be wondering if private lending is the same thing as the other terms you have probably heard. Maybe you have heard the term hard lenders or hard lending. This term is used frequently in American books geared towards private lending or other platforms such as American financial blogs.
The term hard money lending in America is essentially the same thing as private lending. In Canada, however, there are Provincial regulations in place concerning the area of private lending. Our rules are very different in Canada. The exact definition of hard money lending is simply a short-term structured mortgage loan that is secured against the home. The home is used as collateral, in other words, to leverage the loan.
The Role That Mitigating Risk Plays in Hard Lending- Calculating the Loan-To-Value (LTV)
This is why in private lending (hard money lending) private lenders must assess carefully the appraised current value of the property that they will be securing mortgage funds against. Hard money lending is based on assessing risk. To mitigate risk, lenders will ensure as best they can that the money will be there to repay the loan.
In the mortgage industry, the ratio of the value of the property compared to the loan amount request is referred to as Loan-To-Value (LTV). In the realm of hard lending, the loan amount that is finalized will seldom exceed 75% LTV.
The equation that private lenders and lenders in all lending categories use when calculating loan amounts and interest rates look like this: Equation: Loan/Value= LTV. The equation breaks down as literally loan value (requested mortgage amount) divided by the appraised value (the value of the property in question.)
For example, if a house is worth 800,000 in terms of its current appraised value then a reasonable loan amount would be 600,000 which represents 75% of the appraised value of the property or 75% LTV.
Do Hard Money Loans Require a Down Payment?
When structuring a hard money loan, lenders including banks, credit unions as well as private lenders have always paid considerable attention to the amount the homeowner is asking to borrow. The loan amount is contingent on how much can be put down as a downpayment ( if this is a principle loan) or the existing equity in the home for other secured mortgage options such as second mortgage loans, Home Equity Lines of Credit (HELOC), Home Equity loans, or negotiating terms for a new principle mortgage on an existing property.
For Ontario borrowers looking to secure mortgage financing for a principal loan on a given property, the downpayment is still important when borrowing through a private lender. The simple truth is that regardless of the category of lender a borrower is approaching, the age-old mortgage principle applies “ the more you can put down the better the overall terms of a mortgage loan.”
If a current homeowner is seeking a hard money loan in the form of a second mortgage on their property, then a downpayment is an issue. In this case, the mortgage loan will be based on both the LTV, the appraised value of the property, and the degree of equity that exists in the home that the loan will be leveraged against.
What Do Hard Money Lenders Charge?
Generally, hard money lenders will be charging more than their bank counterparts. This relates directly to the increased risk that private lenders face when lending to borrowers with poor credit or difficult to calculate income. Hard money lenders will also lend to homeowners who may have fallen into default with their mortgage payments.
By lending out hard money loans utilizing existing equity, these loans will help to bring homeowners out of mortgage arrears while providing the opportunity to increase their creditworthiness if payments are consistently made in full and on-time monthly.
Interest rates associated with hard money loans usually fall between 7% to 12% depending on the unique financial picture of the borrower/homeowner. Fees associated with hard money loans tend to fall between 3% to 6% of the total cost of the loan.
When Do Hard Money Loans Make Sense?
The answer lies in a couple of fundamental reasons:
- If a borrowers/homeowner’s credit is poor
- If household income is hard to calculate and may involve self-employed or freelance income
- If you have been turned down by lenders and unable to pass the mortgage stress tests
- if you are looking to borrow money quickly
- If you are seeking a short-term mortgage loan
Con’s of Hard Money Loans
- Interest rates will be higher than the banks can charge
- The fees associated with hard money loans will be higher than banks or credit unions
- You need sufficient equity to qualify for private mortgage financing
- You will still have to provide a sizeable downpayment if seeking a private principal loan
- Hard money loans tend to be structured on a short-term basis if you prefer long-term amortized loan options.
Mortgage Broker Store Can Direct your Private Loan Search
At Mortgage Broker Store we are very experienced in all types of mortgage lending options available with specialized knowledge when it comes to private mortgage lending. With access to a broad network of local private lenders in your area, we are more than happy to address any concerns you may have and help you achieve your mortgage goals by directing you to the right mortgage lender to negotiate the best terms to suit your unique economic circumstances.