Individuals with poor or bruised credit are avoiding banks and seeking out private mortgage lenders in Toronto. However, before spending your time trying to obtain a private mortgage on your own, read this.
Why Get a Private Mortgage in Toronto?
More homeowners and aspiring property buyers in Toronto are turning to private mortgages. Living in a dream house, purchasing rental properties, and home improvement is not only a Canadian Dream, they are also the dream for most people. People from Toronto are not an exception. However, borrowing money from banks is not every aspiring homeowner’s dream. In fact, it might turn acquiring a dream house into a nightmare. If the borrower has a lower credit score or has a bad credit, his chances of getting approved for a real estate mortgage are slim. With a new stress test imposed for home buyers in Canada including Toronto, the decline rate of mortgage loan applications from traditional banks has gone up to as much as 20% last year. As a result, many borrowers are turning to private lenders for their mortgage needs.
What is A Private Mortgage?
Private lenders are non-traditional lenders that offer loans for purchasing or renovating an investment property. They could be friends, families or established lending institutions that lend loans based on trust. Private mortgages issued from these lending institutions are short term loans which range between 1 to 2 years in length. Since private lenders don’t lend money based on credit scores, private money borrowers have better chances of getting approved of a loan. This makes a private mortgage the hope of potential homeowners who are going through financial challenges.
Private Loan Cost, Interest Rates, And Monthly Payments
While banks approve refinancing loans based on the borrower’s credit score, private lenders base loan approvals on the home equity or the Loan to Value (LTV) of the property. Others base the loan amount from the After Repair Value (ARV) of the property. So whether homeowners have been denied by banks or they have bad credit, there is still a higher percentage of them getting approved for a private loan.
The LTV is calculated by dividing the value of the existing mortgages by the property’s market value. For example, a home that has an existing mortgage of $500,000 and a market value of $1,000,000, the Loan to Value is 50%. The interest rate depends on the property’s loan to value. The lower the loan to value, the higher the possibility of the loan to get approved by private lenders. Lower loan to value properties has a lower risk. Therefore, they also have lower interest rates. Private lenders in Toronto may allow a maximum of 85% LTV.
Other factors that private lenders consider before approving a private mortgage can be the home equity and the type of mortgage. Location of the property, the property’s condition, and the borrower’s employment are also crucial factors that private money lenders take into account.
Since private funds are sourced from financially successful people who want to expand their investment, they have higher interest rates. As they also have mortgage brokers, they may impose other charges such as broker fees and lender fees. Hence, private loans are considered as “hard money.” Interest rates range from 7% up to 12%, and other lending fees may be between 1.5% up to 10%. Private lenders would typically ask for a down payment from private borrowers in order to protect them from default.
Although the interest rate and other fees are relatively higher than conventional financial institutions’ rates, monthly private money borrowers sometimes have lower monthly payments. Unlike traditional mortgage amortizations, some private loans are assessed as interest-only loans. This allows private money borrowers to pay only the monthly interest throughout the loan term. It is only at the end of the loan that they are required to pay the full amount. When borrowers pay them off before the due date, most private lenders reduce the holding cost while some charge prepayment penalties.
That being the case, private money lenders would best work for short term fix and flippers as well as buy-and-hold investors. Short term fix and flippers are borrowers looking to purchase or renovate a property and sell it within a year. Buy and hold investors purchase and renovate a rental building and then refinance it with a traditional mortgage. Private funds may also be used to avoid real estate property power of sale or foreclosures. It can also be for paying taxes, high interest rate credit cards, debt consolidation, or for home renovations and repairs. Some borrowers use private lenders to re-establish their credit.
Private Mortgage Application Process
Borrowers who need fast money can go to private lenders instead of going through the hassle and lengthy loan process in banks. While a traditional mortgage has a lower interest rate, the approval process of a private mortgage is faster than bank mortgages.
There are two stages of the private loan application process. The pre-qualification phase may take as little as 3 minutes up to 1 week of application. In this phase, private money borrowers are provided a better understanding of their loan options, compare different loan offers, and decide which financing options would work best for them. The next stage is the loan processing and funding which will take between 10-15 days or even up to 3 weeks. This is where the private lenders collect more information about the individual money borrower in order to come up with the loan amount, rates and fees, and loan terms.
Private Loan Application Requirements
To apply for a private money lender loan, private money lenders have their own standardized qualifications. Generally, the requirements during the prequalification phase include bank statements for 2-3 months. A private money borrower should (not absolutely) also have a 550 or higher credit score. Another requirement is property location and expected purchase price. For a rehab loan application to get approved and funded, private money borrowers are also required to submit a CV which details prior projects and experience. They are also needed to have contractor bids, renovation scope of work, and a Purchase Contract that stipulates the agreed terms of sale and the purchase price.
As a professional mortgage professional in Toronto, I have access to numerous private lenders and institutions to assist individuals with bruised credit to obtain a private mortgage.