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Dos and don'ts when getting a mortgage from a private lender

Jan. 20, 2022
3 mins
A young couple speak with a broker and look at paperwork

Sometimes you can’t get a mortgage from a traditional or alternative lender and so you may be considering a private lender.

Private lenders aren’t associated with a financial institution, such as a bank. While the general belief is that people who have a credit score of less than 680 are the ones who use private lenders, these providers also cater to:

● People who want a quick loan and don’t want or can’t wait for the approval process.

● People who want access to a short-term loan for bridging two mortgages

● People who want to buy an unconventional home (e.g., tiny homes)

● People with sporadic incomes, such as freelancers

● People who invest in real estate

When you apply for a private mortgage, you can expect higher interest rates compared to those offered by prime lenders; broker fees and mortgage fees that can add up to 3% of your mortgage; and terms ranging from one year up to 35 years.

With this in mind, let’s look at some important dos and don’ts when getting a mortgage from a private lender.

Do: Know your credit score

Your credit score will affect the terms of your mortgage, such as a higher interest rate, so be aware of the number. If you have time, you could attempt to boost your score by reducing your debt utilization ratio, which is how much you owe on credit divided by your credit limit. The higher the number, the higher your debt utilization number.

Do: Get everything in writing

This includes a snapshot of all your fees. You want to get a full picture of all the terms and conditions of your mortgage, including all the fine print. Private mortgages are not federally regulated, which means the lenders that offer them aren’t required to apply the stress test to see if borrowers can carry the cost of the mortgage at a higher interest rate. They may also apply more fees, so you want to read and understand everything.

Do: Consult with a lawyer

Just because you’re going private doesn’t mean you shouldn’t seek legal assistance. Take your paperwork to a real estate lawyer, ideally one who is familiar with private mortgages. They can help you understand all the terms, conditions, and penalties.

If you decide to go with a private lender, make sure to do your due diligence and build a good team around you before you sign any documents. You want to make sure you get the best deal for you and your future property.

Don’t: Make any big purchases during the approval process

Once you’ve decided to secure a mortgage pre-approval, don’t make any large purchases using credit or apply for more credit. That will increase your debt utilization ratio, which could affect your credit score and as a result, your chances of a pre-approval.

Don’t: Go for the maximum loan

While you may qualify for a large mortgage during the pre-approval process, it’s best to ensure you can make the monthly payments on the loan on time and in full with money left over for your other bills and ideally, savings goals. Remember: a mortgage is a loan, so your ability to pay it back will affect your credit report and score.

Don’t: Forget to compare interest rates

Not only are interest rates high with private lenders, ranging from 10% to 18%, they vary from company to company. So make sure you know what’s on offer.

Don’t just go with the first private lender you find on the internet. Check and compare the interest rates online, and make sure you have a clear understanding of the approval process and the terms.

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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.

Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.

Renee Sylvestre-Williams

Renee Sylvestre-Williams is a finance and business reporter. In her more than 10 years of journalism, her work has been published in the Globe and Mail, Flare, Canadian Living, Canadian Business, the Toronto Star and Forbes. She also publishes a biweekly newsletter, The Budgette, where she provides financial education for single earners.

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