This article has been updated from a previous version.
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 like banks. While the general belief is that private lenders are for Canadians with a credit score of less than 680, these providers also cater to:
● People who want a loan and don’t want to 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.
While private lenders don’t have the same strict qualifications as traditional lenders, they do tend to come with higher fees and rates.
Private mortgages generally come with higher interest rates compared to those offered by prime lenders. They also have broker fees and mortgage fees which can add up to 3% of your mortgage. Terms range 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.
A private mortgage lender is not the same as a traditional or alternative lender. They may share similarities, but they’re often less regulated, and require a bit more due diligence. Here are some Do’s to help ease you along the process.
Your credit score will affect the terms of your mortgage. As with traditional lenders, a lower credit score could raise your interest rate. If you have time, you could try to boost your score by reducing your debt utilization ratio (how much you owe on credit divided by your credit limit). The higher the number, the higher your debt utilization number.
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. Take a fine-toothed comb to the paperwork. You want to get a full picture of all the terms and conditions of your mortgage, including the fine print. They may also apply more fees, so make sure you read everything carefully and don’t be shy about asking questions.
Just because you’re going the private route 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.
Before you sign any documents, do your due diligence and build a good team around you. You want to make sure you get the best deal for you and your future property.
Related: Do you need a real estate lawyer when buying a home?
There are a few ways that a prospective homebuyer could trip themselves up in the process of applying for a mortgage. Here are just three of them.
Once you’ve decided to secure a mortgage pre-approval, don’t make any large purchases using credit. If you increase your credit limit, try not to also increase your spending along with the extra spending room. Doing either would increase your debt utilization ratio, which could affect your credit score and as a result, your chances of a pre-approval.
While you may qualify for a large mortgage during the pre-approval process, make sure you can make the monthly payments on the loan on time and in full. You’ll also want to leave yourself money 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.
Not only are interest rates high with private lenders, but they also 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.