Securing mortgage financing isn’t always a piece of cake. You might be in a situation where you’re having trouble with banks and credit unions, maybe due to problems with credit or income. If that’s the case, this is where private mortgage financing comes in.

Traditional lenders are notoriously picky when granting loans, and it’s not surprising if you find yourself standing outside of their requirements. Private mortgage financing provides you with another option to secure a mortgage. However, since these products are less common, there are lots of important aspects to learn and keep in mind. Read on for an overview of the world of private mortgage financing.

How do private lenders work?

There are three types of lenders in the mortgage industry: A, B, and C lenders. A lenders are your traditional banks or credit unions. They include big banks like TD and Scotia, for example. These federally regulated lenders have the strictest guidelines and lend to people with great credit and reliable income, aka low risk borrowers. 

B lenders cater to people who don’t quite meet the criteria of A lenders, perhaps because of poor credit history or lower income. Since these lenders take on “higher risk” clients, their interest rates are higher. 

Then, we have C lenders, or private lenders, who aren’t regulated in the same way as A lenders are. Private lenders can be either individual investors, groups, or businesses. Getting approved for a private mortgage is often the easiest, but they come with the highest rates. Private lenders are targeted at borrowers whose credit or income doesn’t meet the standards of either A or B lenders.

When is private mortgage financing something to consider?

In general, borrowers would prefer to use traditional lenders for their mortgage needs. However, borrowers can’t always qualify for these strict lenders. A lenders heavily favour super low-risk borrowers who have a fantastic credit history and easily tracked income. If your credit score isn’t great, your income is lower, or even if you’re self-employed and aren’t able to provide proof of a salary, private financing is something to consider. You might also need to consolidate debt or deal with tax arrears. A private mortgage can help reduce debts and improve your credit. 

Bridge financing is another reason to opt for a private mortgage. Sometimes you need to access the equity in your home to finance another expense, perhaps buying a new home. However, that equity isn’t available yet due to timing (for example, wanting to use the sale of your home to buy a new home, but your house isn’t sold yet). Bridge financing builds a financial short-term bridge to connect these two situations. It pulls the equity out of your home so you can use it for the down payment on your new property. 

What are the benefits?

There are some benefits of private mortgage financing. First, these products are far more flexible and easier to qualify for. Private lenders are much more open to the clients they will work with. People who have suboptimal credit scores or a more alternative income stream will often find their place with private mortgage financing. As fewer people fit into the rigid boxes set out by the big banks, this need for flexibility has skyrocketed. 

Second, private mortgage financing has a quicker application process. Since the qualification standards are more lax, borrowers don’t need to go through a stress test or prove income so thoroughly. There’s less stringent checking, so the turnaround time for a private mortgage loan is often speedier. Many private loans are approved within a couple of days, as opposed to weeks. 

Lastly, private lenders are willing to finance more projects, like buying a fixer upper. Traditional lenders won’t provide a mortgage loan for more than the appraised value of a home. If you’re buying a cheap fixer upper and plan to spend a lot to restore it, this will be an issue as you won’t have enough financing to cover the costs. Private lenders are more willing to take on these projects.

What are the drawbacks?

All good things have their cons, including private mortgage financing. Most obvious is the higher interest rates. Since many private borrowers have credit or debt issues, this is viewed as riskier for lenders to finance. Plus, private lenders are more flexible, and higher rates are the exchange. Borrowers can be looking at rates from five to 18 per cent and above, which is to give the lenders assurance they will get money back. Private financing is also a short term solution. Private mortgage financing doesn’t have the lengthy amortization periods traditional mortgages have – many lenders only have one-year terms. This means you can’t rely on these products long-term. Finally, you must be wary about private lender terms. Since they are not regulated, you need to be careful when reading contracts and be sure to ask lots of questions about rates and penalties.

A quick note

Remember that although private lenders are more flexible and lenient, that doesn’t automatically mean you will be approved for a mortgage. They still examine your credit and income and your overall character, even though there’s less emphasis on your exact creditworthiness. Plus, some people shouldn’t take on a private mortgage even if they are approved for it. Depending on your situation, the high interest rates could put you into more trouble. Contact a broker to be your guide before you talk to lenders. A broker will help you see the options that are most likely to work for you.

There’s a lot to digest when you’re considering private mortgage financing. It can be very overwhelming, especially if you’re new to the industry. However, you can turn to a broker to help you navigate the process, including deciding whether it’s right for you and how to find the right lender. 

If you have questions about mortgage financing, get in touch with me!

Customer Service Numbers:

CMHC: 1-800-668-2642
Genworth: 1-800-511-8888
Canada Guaranty: 1-866-414-9109

ATB: 1-800-332-8383
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BMO: 1-877-895-3278
Bridgewater: 1-866-243-4301
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Equitable: 1-888-334-3313
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Chinook Financial: 403-934-3358
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First National: 1-888-488-0794
Haventree: 1-855-272-0051
Home Trust: 1-855-270-3630
HSBC: 1-888-310-4722
ICICI: 1-888-424-2422
Manulife: 1-877-765-2265
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Marathon: 1-855-503-6060
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Servus: 1-877-378-8728
Street Capital: 1-866-683-8090
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