So the time has finally come: the introduction of the new mortgage rules this year is showing its effect on the market. These rules were set into motion July 9th of this year, and their effect has seemingly rippled through the mortgage and housing markets.
Compared to September of last year, housing sales have fallen by 15%. It is not clear if this is a drop caused directly by the new mortgage rules but it is possible (some would say likely) that a correlation exists. Prices are said to have actually risen by 1%, but a drop in a demand for housing is an indicator of a fall in home prices as well.
Looking instead at a “micro” level, the new mortgage rules have displayed an interesting change in consumer behavior as well. Since many individuals can no longer count on traditional lending institutions for financing, they are approaching alternative sources.
Mortgages are harder to get from conventional institutions.
These new rules have made it harder for individuals to finance or refinance their homes with an LTV greater than 80%.
So where does a guy that needs a home equity loan with an LTV greater than 80% go? And if he has a bad credit score, what does he do?
The banks have all but closed their doors to individuals that are in these situations. Many individuals that are in this situation go directly to mortgage brokers for assistance. This is a good move because a mortgage broker should know which lenders will process and accept your application. What you don’t know right off the bat though is that these brokers are probably going straight to their private lending partners to find you the financing you require. Of course, this is exactly what a mortgage broker should be doing but what is really interesting is the trend.
The new, stricter mortgage rules have changed the market so that the pool of consumers with bad credit or a less than ideal financial profile who cannot obtain financing from regular financial institutions such as banks has really increased. These consumers now see a reduced number of options for financial products and services available to them, and their best bet for financing comes from the private sector.
The Advantages of Borrowing from Private Sources
Given the new trend, it’s important to point out the advantages of borrowing from private sources.
Probably the biggest advantage in borrowing from a private source is the fact that private lenders are much more lenient than conventional lenders. They have fewer guidelines to follow as they are not large organizations. The other benefit of their small size is the turn-around time they have for applications: with less red-tape the processing time of a file is vastly reduced.
Another great benefit of a private lender is the fact that they don’t put a lot of emphasis on your credit score and place their focus more on your loan repayment capabilities.
The Limitations of Borrowing from Private Sources
There exist two main issues in borrowing from private sources: the first is finding one in your area, and the second is ensuring that your property meets their quality standards. And by the latter i mean that private lenders are mostly interested in property situated near city centers, or if in a less populated location, they are interested high-quality property. This is especially true for commercial mortgages.
It’s important to also note that private lenders take on more risk than the banks. To compensate for this risk they tend to charge higher rates than banks do, but when it comes to loans secured by property interest rates tend to stay at reasonable rates.
Also worth noting is the fact that private loans are short term loans. If you have less than stellar credit and a bank is refusing to finance you, obtaining a private loan can be a good way to start rebuilding your credit score and work your way towards an approval with a lower rate from a bank later on.
