When it comes time to apply for a mortgage, many Canadians automatically look to their bank. While these traditional lenders offer a variety of mortgage products, they’re not the only source for home loans.
Borrowers who don’t meet the strict lending criteria to get approved for a mortgage through their bank may want to look to private mortgage lenders when applying for a home loan to finance a home purchase. Let’s take a closer look at private mortgage lenders to help you decide whether they’re a better option for you when applying for a mortgage.
A private mortgage lender is an individual or private company that lends out its own money. In Canada, these lenders are often referred to as B lenders or subprime mortgage lenders. Because they don’t fall under the same regulatory framework as regular mortgage lenders, they are able to offer mortgages to Canadians with poor financials or bad credit scores.
Private mortgage lenders offer many of the same loan products that you’d get from traditional big banks, including the following:
If you need to finance the purchase of a home, you’ll usually need a mortgage. These are installment loans that require you to repay the loan amount in regular installment payments, plus interest until the full loan amount is repaid by the end of the amortization period. In Canada, mortgages require at least a 5% down payment, the most common term is five years, and they typically take 25 years to pay off in full.
A first mortgage is the primary lien against your home that takes precedence over all other mortgages you might take out. A second mortgage, on the other hand, is second in line to be repaid.
If the home is sold or you default on your mortgage payments, the first mortgage will be the first to be paid off before the second mortgage. For this reason, second mortgages are a little riskier for lenders, who will likely charge a higher interest rate in exchange for this increased risk.
A bad credit mortgage is one that is designed to help borrowers with poor credit scores obtain a mortgage. A traditional mortgage requires a healthy credit score for approval. If you’re unable to get approved for a conventional home loan because of sub-par credit a bad credit mortgage may be an option.
Keep in mind, however, that these mortgages often come with higher mortgage interest rates.
Refinancing your mortgage involves replacing your current mortgage with a new home loan. The most common reason to refinance is to secure a lower interest rate to save money, though refinancing can also be an option to change other loan terms or shorten the amortization period.
How do private mortgage lenders differ or compare to banks? Let’s take a look at certain features of each and see how they compare to one another:
| Banks | Private Lenders | |
| Fees | Lower fees | Higher fees |
| Interest Rate | Banks generally offer lower interest rates which can vary between 1.5% to 5% on average | With private lenders, you can expect higher interest rates than banks, which can range from 6% – 20% (depends on the property and economic environment) |
| Terms | Longer terms, anywhere from 1 – 5 years | Shorter terms, typically 1-year |
| Borrowing Amount | Banks will generally let you borrow up to 80% of your home’s value, but the amount you qualify is also based on the mortgage stress test. | Up to 85% of the home’s value |
| Application Process | More stringent approval process that requires high income and credit score | Easier application and approval process |
Banks place a lot of weight on a borrower’s credit score when determining whether or not to approve a mortgage application. A credit score tells lenders how likely a borrower is to make their payments on time.
Borrowers with low credit scores may have trouble getting approved for a mortgage from a conventional bank, but private lenders typically don’t put nearly as much emphasis on a credit score when reviewing a mortgage application. That said, they do look at other factors and may have more stringent requirements in other areas to assess risk:
The most important factor that private lenders use to assess a mortgage application is the home itself. Ideally, the home should be in good condition and must be appraised by a professional. Lenders will want to make sure their funds are going toward a secure asset in case you default on the mortgage, especially if you have low credit.
Your income will need to be high enough to cover not only your mortgage payments but all other financial obligations you have. Your lender will either need to verify your income through a Notice of Assessment or may need to estimate your income based on your specific type of employment. This is more commonplace with self-employed or commission-based borrowers.
Typically, the minimum loan-to-value ratio that private lenders accept is 85%. That means you need to come up with at least 15% of the purchase price of the home in the form of a down payment to get approved. A higher down payment is even better, as it will increase your odds of approval and reduce your monthly mortgage payments.
Private lenders might let you refinance up to 85% in loan-to-value (LTV). For instance, if your home is currently appraised at $500,000, you can refinance up to $425,000. The exact amount will ultimately be up to the individual lender.
New immigrants typically have limited or no Canadian credit history, which can make it much more difficult for them to get approved for a mortgage with a conventional lender. Credit bureaus like Equifax and TransUnion only gather credit data within Canada, so anyone with foreign credit would have to build Canadian credit from the ground up.
Further, immigrants will have a limited employment history in Canada. Conventional banks typically require a much higher down payment amount for borrowers who don’t have at least two years’ worth of Canadian employment history.
This is where private lenders can help. The hurdles that newcomers to Canada might face when applying for a mortgage can be avoided when applying with a private mortgage lender, as the criteria to get approved are slightly different than what big banks typically require.
As long as applicants meet the above-mentioned criteria for private lenders — including a healthy income and higher down payment — they’ll have a higher chance of approval.
One of the lending requirements needed to get approved for a mortgage with a conventional bank is at least two years of employment to prove a steady stream of income. For a salaried employee, this is typically not an issue. However, self-employed individuals might find this requirement difficult to meet, especially when the income fluctuates from year to year.
Fortunately, private lenders make it easier for self-employed borrowers to get approved for a home loan. As long as the applicant can show some sort of proof of an income that can support loan payments, there’s a higher chance of mortgage approval with a private lender.
Mortgage default insurance covers the lender in the event that the borrower defaults on the loan. However, the borrower is the one responsible for paying the premiums, even though it’s the lender who is covered.
Conventional mortgages require mortgage default insurance if the down payment is less than 20%, in which case the mortgage would be considered ‘high ratio’ Because of the higher risk for the lender to loan out a high percentage of the property’s value, mortgage insurance can protect the lender.
Since private mortgage lenders are often not regulated by government entities, mortgage default insurance is typically not an option. But other insurance criteria are still required, such as homeowners insurance to cover the property against damage from a fire or other natural disasters.
There are a few important benefits of private lenders, particularly when it comes to meeting stringent mortgage criteria. But there are also a few drawbacks to consider before applying.
Private mortgage lenders are great alternatives to more traditional mortgage lenders if you have poor financials or are struggling with bad credit. If one of the cases below fits your current mortgage situation then you should definitely consider working with a private lender. A private lender’s specialized service will give you peace of mind and help you through your unique mortgage journey.
If you choose the right private lender, one that you’ve heard good things about and that has the right credentials, then working with them will be similar to working with a traditional lender. People often associate banks and other traditional lenders with stability and experiences, which is the truth but if you choose the right private lender then you’ll experience all that and more. Private lenders want to work for you and with you to get the home loan you need. If you’re still wary about which kind of lender you want to go with, here are
Private mortgage lenders make it possible for borrowers with different credit backgrounds to get approved for a mortgage that may not be possible through the traditional lending route. If you have a low credit score or don’t have conventional employment verification that traditional banks may require, you might have better luck with a private mortgage lender.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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