The world of real estate can be a complicated one. The mortgage sector is expansive, involving various players and covering areas crucial for both lenders and borrowers. Like any sector, there is a maze of information to digest and questions to be answered. This metaphor holds for the potential borrower, where many problems can arise from different mortgage transactions, which include home purchases and mortgage refinancing.
These questions are pivotal to making the informed decisions necessary to secure a mortgage loan with the best possible terms. Know that in Ontario, many options exist for borrowers beyond traditional big banks, crucial information for potential borrowers. Choices that make mortgage approval possible, despite financial obstacles that conventional lenders may not be able to overlook.
Private lending offers an untapped avenue outside government-regulated players, opening borrowing and lending opportunities in the mortgage market. The burgeoning area of private lending has grown considerably in recent years, leading to well-established and regulated private lending companies that help fill the void that big lenders have left open.
Our Private Mortgage Lending Guide
Private lending has also attracted savvy investors willing to loan out money for different types of mortgage loans to borrowers that may not meet the strict criteria nor pass the often highly restrictive mortgage stress test imposed by the big banks.
Private lenders assess criteria beyond credit scores, including income, existing assets, and often require higher down payments for mortgage approval. Mortgage loans offered by private lenders will often be shorter in length and have higher interest rates. However, mortgage approval remains possible by overlooking poor credit that the big banks will not.
Private lending brokerages negotiate mortgage terms for borrowers facing financial roadblocks, like poor credit, where traditional lending may be impossible. Some mortgage brokerages, such as Mortgage Broker Store, also act as private lenders. Such brokerages offer direct funding or act as intermediaries with other lenders, prioritizing the borrower’s best interests.
This guide will arm you with the necessary knowledge to utilize the private lending sector for obtaining first, second, or third mortgages or bridge loans when other options are not possible, offering a viable route to mortgage approval when banks pose roadblocks to homeownership and home equity borrowing.
Understanding Private Loans
Before seeking a private lender, thoroughly understand what a private loan entails and the concept of private lending.
What is private lending?
Simply put, private lending is lending money to a third party via different potential avenues. The best private mortgage lender can lend out capital from different sources, including cash, Home Equity Line of Credit (HELOC’s), RRSP’s, RIFF’s and TFSAs, for example.
Hard money lending
You may have heard the term hard money lending.
In the United States, people most often use this term to refer to lending out funds privately rather than through a bank. In Canada, the term is not often used, but it essentially represents the same parameters as private capital lending outside of the major banks. The best private mortgage lender will determine the mortgage terms like a bank would and structure deals ranging from principal plus interest loans (most utilized by the big banks) to interest-only loans.
There remains great flexibility of terms negotiated in the realm of private lending and plenty of wiggle room to approve mortgage deals even with poor credit. A private lending brokerage will be able to negotiate mortgage terms for a borrower who may be facing other financial roadblocks making traditional lending opportunities impossible.
Private loans offer different terms than traditional lenders, particularly catering to individuals with poor credit by considering a wider range of criteria and providing greater flexibility in negotiating mortgage terms. Additionally, private loans typically have shorter term lengths compared to those negotiated with major banks.
It is also important to reiterate that the final interest rate negotiated on private loans will be higher than what traditional lenders will offer. The reason for the higher interest rates on private loans is based on the risk assessment of the loan. When a potential borrower has poor credit, lenders perceive the mortgage loan as a higher risk, leading to an increase in interest rates.
While a big bank typically lends out the vast majority of low-risk, longer-term first mortgages on a given property, private lenders extend higher-risk first mortgages, as well as second and third mortgages classified as higher-risk loans.
How Does a Private Mortgage Loan Work?
Private lending differs in various ways from how the major banks lend out mortgages. The best private mortgage lender is available to provide more flexible terms and bridge the lending gap that traditional lenders have left open when relying on such strict criteria. However, private lenders often overlook issues like poor credit as they consider various factors in determining mortgage approval.
Private lenders look at criteria beyond credit scores and rather take into consideration:
Income
Private lenders will look at all existing sources of income, including self-employed income, income from existing investments, child support income and even child tax credit. The crucial point is that income calculations include sources beyond just base salary.
Existing assets
The best private mortgage lender closely examines other real estate or existing assets and utilizes them as collateral for the loan. Private lenders will require an appraisal on existing property and will rely on this appraisal in the mortgage loan calculation of assets.
Sizable down payments
While a big bank will readily offer mortgage options with as little as 5% down, they are doing so based on exemplary credit. Although these loans are reliant on a small down payment, they are still considered low-risk loans and are backed with insurance by the Canadian Mortgage and Housing Corporation (CMHC). Private lenders will demand a larger down payment to offset credit shortfalls when approving mortgages. Additionally, private mortgage investors/brokers factor in the larger down payment, considering all income sources and existing assets in the mortgage equation.
Private mortgages will typically have shorter term lengths.
As we mentioned, big banks and traditional lenders (A lenders) rely heavily on approving first mortgages with longer term lengths (typically 25 to 30-year amortization length). These loans leave the banks confident that they will see reliable returns on their mortgage investments. Private lenders are able to offer more flexible term lengths on mortgage loans and often opt for lending out short-term length mortgages to be able to recoup their money easily and quickly.
When borrowers are applying for a loan with a private lender, the same principles apply as they would when approaching a major bank. Paperwork must be filled out, and the borrower must provide the necessary documents, and appraisals will be reviewed on any existing properties (especially in the case of applying for a second mortgage on a given property).
The same mechanisms are in place, in other words, in the process of applying for a mortgage loan. The major difference to remember is that the parameters for mortgage approval do differ when determining eligibility, as illustrated above.
Are Private Lenders Better Than Banks?
Are private lenders a superior choice for mortgages over banks? You might be pondering this question. There is no right or wrong answer to this question.
The defining factors that will determine your mortgage search will be based on:
- What type of mortgage are you seeking?
- How solid is your financial footing when applying for a mortgage?
- Whether you are seeking a short-term or long-term mortgage.
- What is your FICO or credit score at the time of mortgage application?
Borrowers seek customized mortgages to match their financial situations and goals. If a borrower’s credit score is below a major bank’s minimum threshold, opting for a private lender is recommended. Poor credit can still be addressed through negotiation with a private lender, which is often the best option.
Similarly, if a borrower is looking for a short-term loan that represents a second mortgage on their existing property or even a bridge loan between mortgages, again, a private lender would be able to offer immediate help and achieve these particular mortgage needs.
Individuals with good credit typically choose banks for primary mortgages, while private lenders offer secondary mortgages for shorter terms, often to those rejected by banks. Private lenders can also provide quick financing for home renovations or bridge loans, though they usually cannot offer Home Equity Lines of Credit due to administrative complexities.
The best private mortgage lender offers a preferable alternative for self-employed individuals seeking mortgage loans, as they consider all income sources and negotiate terms accordingly, whereas banks typically favour salaried employees, making it challenging for self-employed individuals to qualify.
It is an excellent option for those with poor credit, self-employed borrowers and those looking for short-term financial help to cover immediate financial needs. Determine if the flexibility and relatively quick approval process of private loans fit your overall mortgage goals.
Approval Criteria for the Best Private Mortgage Lender
So what criteria are private lenders looking for in particular when determining mortgage eligibility? The good news is that the approval process through a private lender, whether it be an individual private lender, private lending firm or Mortgage Investment Corporation (MIC) is much faster than through traditional lenders, and the criteria are broader and less restrictive.
The criteria that private lenders are looking for include:
- Assessing the Loan to Value (LTV) of your existing property—When determining a second or third mortgage on a given property most private lenders will lend out up to 75% of the value (LTV) of a given property. If the property in question is worth 1 million, a private lender will lend up to $750,000, for example.
- Assessing local market demand—In general private lenders prefer to lend in major cities. A private mortgage lender must consider how easy it would be to sell a property if the borrower were to not make mortgage payments. In general, properties in cities increase in value faster and can sell faster when compared to rural properties. Most private lenders will have lower maximum LTVs for rural properties.
- Determining the condition of the property—In general, heavily damaged properties or properties with non conforming features will sell more slowly on the open market. For this reason may private lenders will have lower LTVs for properties that are considered substandard for their area.
- All sources of income—which can be demonstrated by documents such as Notice of Assessment (NOA) and bank statements. While debt to income ratios will not be considered, most lenders will want evidence that the borrower is able to afford to make all mortgage payments.
- All financial assets—which can include other real estate, stock portfolios, RRSPs and other investments. In some cases, these additional assets can be considered collateral on a private mortgage loan.
Different Types of Private Mortgage Loans
Borrowing from private lenders is a wise route on the road to mortgage approval because there remains impressive flexibility in terms of what types of mortgage loans they can offer.
Some of the primary mortgage loans that private lenders can provide:
- First mortgages with rates typically averaging around 7–8%.
- Second mortgages on existing properties with rates averaging between 9–12%.
- Third mortgages entail significantly higher interest rates since lenders regard them as high-risk loans.
- Bridge loans to help finance for a short period of time, typically 3–6 months in duration. In some cases, these kinds of mortgages are registered against multiple properties at once.
Additionally, private lenders can offer other loans that do not involve mortgaging a specific property. The following loans are beneficial for those seeking short-term financial help to alleviate immediate needs such as:
- A consolidation loan to pay off high-interest credit cards in one manageable monthly payment.
- A home improvement loan to pay for immediate renovation needs without going through the lengthy loan application process through a major bank.
- A Home Equity Line of Credit (HELOC) allows you to access equity built up in your home quickly and for a shorter term to pay for immediate expenses you may have. Since this kind of loan is more challenging to manage, only a limited number of more sophisticated private lenders are able to offer HELOCs.
By being able to provide a wide variety of the types of loans on offer and by doing so typically faster and with less hassle than the large banks, many borrowers can benefit from a private loan arrangement.
What Distinguishes A, B, and C Lenders from Each Other?
In order to further understand the role private lending plays in the mortgage market, it is beneficial to be able to differentiate between the types of lenders that are available. Lenders fall into three main categories. Each category has its own criteria required of the borrower in order to be ultimately approved for a mortgage loan. Lenders are considered to be either A Lenders, B Lenders or C Lenders.
A Lenders
• Require very strong credit scores and salaried income.
• Typically are banks and what are referred to as Monoline lenders (lenders that loan directly and only deal with mortgage loans).
These lenders have strict criteria that the borrower must meet. An A lender will determine your creditworthiness and look at salaried income by assessing credit reports and the borrower’s Notice of Assessment (NOA). Most of the mortgage loans these lenders provide are first mortgages with lengthy amortization (term length) periods. Lending fees can be kept at a minimum, and the interest rates on these loans tend to average around 2%.
B Lenders
• Provide mortgage loans to borrowers who may not have credit that meets the demands of A Lenders.
• The vast majority of the loans offered by B lenders are first and second mortgages with shorter amortization periods than the banks.
• Examples of B lenders are trust companies and credit unions.
These lenders will charge slightly higher fees than A lenders, averaging between 1–2% of the overall cost of the loan. Interest rates attached to these mortgage loans average between 4% and 6%.
C Lenders or private lenders
• Private mortgage lenders that take the form of either individual private lenders, Mortgage Investment Corporations (MICSs) and private mortgage syndicates.
• Help to provide borrowers with different types of mortgage loans on a typically short-term basis (usually 6 months to 2 years).
• Provide mortgage solutions to borrowers who may have difficulty proving yearly salary and may have poor credit.
Differentiate Between Types of Private Mortgage Lenders
Individuals
These are wealthy individuals who seek to lend money on mortgages as a source of income. These people can either be full-time lenders or have an unrelated job and lend on private loans for additional income. These kinds of lenders generally are harder to find since they typically do not widely advertise. These lenders also have fewer costs and expenses than larger and more organized private lenders.
Syndicated lenders
This is a small group of lenders who have pooled money together in order to fund a mortgage. Once registered, each individual lender will explicitly own a portion of the mortgage. This is common with individual private lenders who need additional funds to fully finance a large mortgage. Syndicated Mortgages have come under intense government scrutiny, as of late due to investment scams from Fortress Financial and similar companies.
Mortgage Investment Corporations (MICs)
This is a pooled fund consisting of at least 20 different shareholders. This type of corporation received tax advantages but must adhere to certain government regulations. When a mortgage is registered by a MIC, it is in the name of the MIC and not the individual lenders. Most MICs offer rates of return from 7–12% to investors and will deal with all tasks related to managing and administering the mortgages. This is a common option for less sophisticated investors who want to earn money in real estate lending.
Breakdown of The Fees Involved with Private Mortgages
There are a variety of costs and fees involved with a private mortgage. In general, the majority of fees are paid from the mortgage proceeds. The only fees which are required to be paid out of pocket are the appraisal fee and lender’s administrative fees.
The fees directly charged by the lender include interest payments
The bulk of the payment that private lenders receive is in the form of interest payments on each mortgage loan. Interest is usually averaging between 6–10% on some of the higher-risk second or third mortgage loans.
Lender setup fees
Some private lenders choose to charge their borrowers setup fees, often termed as, “Lender Fees” in the mortgage documentation. Setup fees represent a certain percentage of the overall mortgage loan. Private lenders must charge setup fees alongside other lending fees to cover expenses that are associated with initiating and discharging mortgage loans. A typical lender fee would be 2% of the mortgage loan.
Lender administrative fees
When preparing the commitment for a private mortgage, lenders incur a set number of costs. These include payment to employees for drafting paperwork and payment to government agencies to pull property data. This fee is usually between $300–$650 and is typically due when the lender delivers their mortgage commitment.
Mortgage termination fees
When structuring a private mortgage, private lenders will often charge exit fees in addition to other applicable fees. These fees are paid by the borrower at the end of the term of the loan. They are used to cover related costs for the private lender and are usually equal to three month’s worth of interest payments.
Other Fees Include:
Mortgage brokerage fee
If you work with a mortgage broker or agent, you can also expect a “Brokerage fee” roughly equal to the lender’s “Lender Fees.” This fee pays the mortgage broker, agent, and all administrative staff involved in arranging the mortgage. It is paid from the mortgage proceeds after the mortgage has been finalized.
Appraisal fee
The final value of the property is determined by an appraisal report from a company of the lender’s choosing. The appraisal company is typically required to have AACI and CRA accreditation with the Appraisal Institute of Canada. The report usually costs $300–$500 and is due after the appraisal inspection.
Legal fees
In order to close a mortgage, the borrower’s and lender’s legal teams must work together. These legal costs usually range from $1,000 to $3,000, depending on the complexity of the mortgage, and are paid from mortgage proceeds.
Lending Matrix
Maximum Loan to Value Ratio (LTV)
Interest Rate
Lender Broker Fees
A 2% premium will be applied on any of the following properties:
- Mortgage arrears
- Retals
A minimum RUSH fee of $2,000.00 will apply on urgent closings
Pricing and programs are subject to change at anytime without prior written notice
- Minimum Loan Amount: $35,000.00
- Maximum Loan Amount: $2,000,000.00
- Standard Mortgage Term: 1 year
Exceptions may apply call for details
A 2% premium will be applied for any of the following properties:
• Mortgage arrears
• Rentals
A minimum RUSH fee of $2,000.00 will apply on urgent closings. Pricing and programs are subject to change at any time without prior written notice.
• Minimum Loan Amount $35,000.00
• Maximum Loan Amount $2,000,000.00
• Standard Mortgage Term 1 year
Exceptions may apply; call for details.
What Do The Best Private Mortgage Lenders Look for in a Borrower?
For some private lenders that approve mortgage requests, the decision to approve a mortgage can sometimes be a deeply personal decision for the lender. Private lenders seek diverse borrower types, mirroring the variety among available lenders in the market.
Generally, private lenders will be looking for a borrower who has been referred perhaps by a mortgage broker, real estate lawyer or other real estate professionals. This borrower will likely have the traits that will be attractive to a potential private lender, including trustworthiness, reliability, professionalism and the ability to communicate while discussing mortgage terms.
The private lender will also scrutinize the capital or overall assets that the borrower brings to the table, encompassing all sources of available income, any additional properties, or significant assets that could serve as collateral on the mortgage loan.
The best private mortgage lenders often receive approaches from various borrower types, considering not just character but also financial circumstances.
These Borrowers Usually Fall into Broad Categories, Which Include:
People in financial crisis
Individuals experiencing job loss, severe injury, or other traumatic events may encounter cash flow difficulties. They have difficulty making all their payments in the short term and require temporary financial assistance.
Equity rich cash poor
With Ontario real estate values rising, many people with no expendable income have large amounts of home equity. These people can use their property for secured loans, which carry far lower interest rates than unsecured loans. The money serves various purposes, such as bill payments, education expenses, and financing renovations.
Chronic debt issues
People without solid financial literacy skills may tend to accumulate expensive debt, spiralling out of control. While most lenders will reject the loan based on the merits of the borrower, a private lender can approve a loan solely on the equity in the property. The best private mortgage lender will analyze this person’s situation and recommend methods of staying out of debt in the future.
Rehab/sell and rehab/rent
This includes those looking to make major renovations on a property and seeking short-term financing to achieve their goals with the objective of refurbishing and eventually selling the property or refurbishing and renting out the property for investment income.
Builders/developers
The best private mortgage lenders are often approached by builders and real estate developers that are looking for quick financing on a short-term basis to further develop projects and put the money towards their investment properties in the form of renovations and upgrading.
Commercial investors
Private lenders also deal with the commercial end of real estate lending. Loans to cover renovations on commercial property or loans to finance commercial projects for example.
Top Benefits of Private Lender Mortgages
By now, you can see that borrowing through a private lender is a good decision if you require financing quickly and may have encountered stumbling blocks when approaching the banks (A lenders.) Private lending is also a growing market.
The top five reasons why people choose to get a private mortgage:
- Lenient Approval Criteria—While the majority of other loan providers will look at a borrower’s credit score, and employment, the majority of private lenders will strictly consider the equity in the property. Banks, credit unions, and trust companies have already rejected most people who use private lenders. Borrowers that use private lending companies accept that the high chance of approval comes with higher rates and fees.
- Faster Mortgage Processing—For people facing power of sale, foreclosure, tax sales, or eviction for any other reason, require the fastest possible financing solution. Financing with traditional lenders is much more carefully regulated, with mortgage completions taking a month or more. Private mortgage lenders require far less administrative work to process a mortgage. The typical private lender mortgages take two weeks to arrange, but financing can be completed in as little as one week if required.
- Flexible Mortgage Terms—Banks have strict mortgage contract terms, whereas private lenders customize agreements to suit borrowers’ needs. Custom mortgage terms may include pre-paid interest, blanket mortgages, and pre-payment privileges. Private lenders often accept reasonable alterations proposed by borrowers.
- Large Loan Amounts—While credit cards and personal loans can be the easiest kind of loan to get, the amounts you can borrow typically cannot exceed $30,000. Private lender mortgages are secured against real estate, so lenders can comfortably lend amounts well in excess of $30,000.
- Lower Interest Rates—While private lender mortgage rates exceed those charged by banks, trust companies and credit unions, they are still cheaper than many other types of loans. Many borrowers use private mortgages to pay off more expensive debts, which include personal loans, credit cards, and car loans.
The Private Mortgage Process from Start to Finish
Initial discussion
In general, your first point of contact when requesting a private mortgage is either a mortgage broker or a direct private lender. The initial discussion will be to gather details to see if you meet the basic criteria for approval. The key information needed will include the property’s address, the existing secured debts, and the amount of the requested mortgage. In most cases, the approval is solely based on the Loan to Value (LTV) ratio, which uses a computer-generated value estimate for the property.
Shortly after, the mortgage provider should send the borrower:
• Estimated outline of costs
• Application form
• List of required documents
Complex requests, which include customized mortgage agreement terms, can take much longer to analyze but still follow much of the same process.
Computer-generated value estimate
The software that generates estimated property values is called an Automatic Valuation Model (AVM). The most popular AVM software for Ontario mortgage providers is called Purview, which is developed and maintained by a company called Teranet. This value estimate is primarily based on recent sales of comparable properties in close proximity to the subject property. This valuation is usually produced during the initial conversation.
Review the Outline
After you’ve reviewed the general outline of the mortgage with all listed costs, you can decide whether or not you would like to proceed further. If the estimate of costs is far too expensive, or the other terms are undesirable, you can decide to cancel the mortgage request. If the mortgage appears acceptable, then the next step in processing the mortgage can begin after the mortgage application, and other supporting documents are sent.
Common mortgage documentation
• Completed and signed application form
• Signed permission form to pull a credit report
• Income and employment verification (pay cheque stubs or T4’s)
• Notices of assessment from Revenue Canada
• Two pieces of photographic identification for everyone on the title to the property
• Borrower’s lawyer’s contact information
• Any previous mortgage statements
• Property insurance
• Two utility bills for gas, water, or electricity
• Most recent property tax bill
• Condo status certificate (for condos only)
Comparing Lenders and Mortgage Commitment
A mortgage broker will typically take your mortgage application to several different private lenders to bargain for the best rates, fees and terms. After comparing several lenders, the broker can send a direct mortgage quote from the lender. This quote aligns closely with final mortgage costs and terms, differing from the initial estimate. As with the estimate, the borrower can decide whether or not to proceed further.
If the borrower decides to proceed, the lender presents the borrower with a “Mortgage Commitment” document. A mortgage commitment is the lender’s promise to provide a mortgage with defined costs and terms to the borrower. Commitments usually necessitate legal approval and can be invalidated if new information changes the mortgage’s risk profile.
If a mortgage broker is involved, the broker will also send a set of documents to meet their regulatory requirements.
Documents the broker might send the borrower include:
• Finalized Mortgage Application
• Mortgage Summary
• Disclosure to Borrower
• Letter of Direction
• Amortization Schedule
After the lender receives the signed mortgage commitment, the lender will begin to finalize the mortgage transaction. Some lenders may insist on an upfront administration fee of $300–$650 to proceed at this point. This pays for out-of-pocket costs the lender must incur, including pulling credit reports, performing a writ search, and drafting paperwork.
Verification, Signing and Transfer of Funds
Following this, the lender’s legal team verifies the accuracy and disclosure of all relevant mortgage information. These lawyers authenticate personal identification and thoroughly examine the subject’s records to uncover any undisclosed debts or pending legal actions. Upon completion by lawyers, mortgage funds undergo transfer into a secure trust account, poised for further processing.
The borrower’s lawyer will be responsible for explaining the mortgage agreement in plain terms to the borrowers. This service is typically called Independent Legal Representation or Independent Legal Advice, and it is needed to ensure the borrowers fully understand the mortgage agreement. Borrower’s and lender’s lawyers collaborate to finalize documents and complete fund transfer for a property transaction.
Who Regulates Mortgage Brokers That Work With Private Lenders?
The question often arises whether private lenders are regulated similarly to other mortgage brokers in Ontario. The fact is, private lenders themselves are not directly regulated, but the mortgage brokers and agents they collaborate with are.
The Mortgage Brokerages, Lenders and Administrators Act mandated in 2006 dictates that all businesses and individuals that carry out mortgage brokering services are to be licensed and registered with the government agency that is responsible for overseeing mortgage brokering, the Financial Services Regulatory Authority (FSRA), formerly known as Financial Services Commission of Ontario (FSCO).
Private lending is not only a very widely used lending service. It is also a safe loaning option with regulations in place similar to other traditional lenders. Private lending is favoured for its quick processing and suitability for short-term financing in reaching mortgage goals.
How to Select a Private Lender to Suit Your Needs
Choose a lender who assesses your eligibility and offers valuable mortgage advice tailored to your financial circumstances and objectives.
At Mortgage Broker Store we will be more than happy to sit down with you and help you pinpoint your lending requirements while giving you expert direction and advice. With a vast network of private lenders affiliated with us, the Mortgage Broker Store will be able to steer you in the right direction and set you up with a private lender to help you achieve your desired mortgage goals. Whether you’re seeking a first mortgage, second mortgage, or specialized loan, we’ve got you covered.
- Introduction
- Understanding Private Loans
- How Does a Private Mortgage Loan Work?
- Are Private Lenders Better Than Banks?
- Approval Criteria for the Best Private Mortgage Lender
- Different Types of Private Mortgage Loans
- What Distinguishes A, B, and C Lenders from Each Other?
- Breakdown of The Fees Involved with Private Mortgages
- Other Fees Include:
- What Do The Best Private Mortgage Lenders Look for in a Borrower?
- These Borrowers Usually Fall into Broad Categories, Which Include:
- Top Benefits of Private Lender Mortgages
- The Private Mortgage Process from Start to Finish
- Comparing Lenders and Mortgage Commitment
- Verification, Signing and Transfer of Funds
- Who Regulates Mortgage Brokers That Work With Private Lenders?
- How to Select a Private Lender to Suit Your Needs