*This post was created in collaboration with Alpine Credits
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.
What Are Private Mortgage Lenders In Canada?
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 who can’t pass the stress test or who have bad credit scores.
Types Of Private Mortgage Lenders
- Individuals – These private mortgage lenders are simply individuals who lend out their money in hopes of gaining a return.
- Mortgage Investment Corporations – This Involves a group of investors who pool their funds and are able to lend to multiple people who meet their lending criteria.
- Syndicate – This involves a group of investors who pool their funds for a single borrower or on a case-by-case basis.
Types Of Mortgages Private Mortgage Lenders Offer
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. The most common term is five years, and they typically take 25 years to pay off in full.
In Canada, mortgages require at least a 5% down payment, though some private mortgage lenders may allow no down payment.
Your 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. That means, 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.
Second mortgages come in different forms. The most common second mortgages in Canada are:
- Home Equity Loans
- Cash-Out Refinance
- Reverse mortgages
Where Can You Find Private Mortgage Lenders In Canada For Second Mortgages?
If you’re looking to tap into your home equity, there are a plethora of private mortgage lenders you can choose from. If you’re someone with bad credit or low income, you can still access your home equity through private mortgage lenders like Alpine Credits. They base their approvals on the amount of equity in your home, not your credit or income.
Moreover, these private mortgage lenders like Alpine Credits often provide approvals within 24 hours or less. You can also get a quote to see how much you qualify for without hurting your credit.
Bad Credit Mortgages
A bad credit mortgage is one that is designed to help borrowers with poor credit scores obtain a mortgage. A traditional mortgage requires a good 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.
Banks vs. Private Mortgage Lenders
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:
|Private Mortgage Lenders
|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)
|Longer terms, anywhere from 1 – 5 years
|Shorter terms, typically 1-year
|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%-95% of the home’s value
|More stringent approval process that requires high income and credit score
|Easier application and approval process
|Credit score requirement
|You generally require a good credit score of 660 at least to qualify
|You may qualify even if you have fair to poor credit.
Private Mortgage Lender Borrowing Requirements
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. On the other hand, private lenders 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, such as:
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 your mortgage payments and 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 approval odds and reduce your monthly mortgage payments.
Equity (For Refinancing)
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.
Can New Immigrants Get A Mortgage Through A Private Mortgage 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.
Can A Self-Employed Person Get A Mortgage Through A Private Mortgage Lender?
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 their 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 income that can support loan payments, there’s a higher chance of mortgage approval with a private lender.
Do You Need Mortgage Default Insurance With Private Mortgage Lenders?
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.
Pros Of A Private Mortgage Lender
There are a few important benefits of private lenders, particularly when it comes to meeting stringent mortgage criteria.
Applying for a mortgage from a private lender is much faster and easier compared to conventional lenders because they’re not required to follow the same set of stringent regulations that banks do. Private mortgages are typically offered regardless of your credit scores and are based more on other factors, such as your income and the property type. You may be able to get approved in as little as 48 hours after your application has been submitted.
Accepts All Types Of Credit
While higher credit scores are always best, lower scores may be accepted by a private lender. As such, you may have an easier time getting approved for a mortgage from a private lender than you would through a traditional bank.
Less Stringent Loan Requirements
Conventional lenders require borrowers to meet a list of strict lending requirements for approval, which can be tough for self-employed applicants or those with non-traditional ways of verifying their income. On the other hand, private lenders place more weight on other lending criteria, making it easier to qualify.
No Mortgage Default Insurance
Since private lenders are unable to get coverage through mortgage default insurance, you won’t have to worry about paying this extra expense.
The Personalized Service
With a private lender you receive a much more personalized service. The mortgage specialist that you work with will make sure they know all the ins and outs of your situation so that they can provide you with the best options.
Freedom Of Choice
One of the best things about a private mortgage is that you choose who you want to work with. Often people who choose to go with a traditional lender simply have to work with the only bank that will approve them. This can feel limiting and like you have no say in the process. There are more options available for those who choose private mortgages.
Cons Of A Private Mortgage Lender
There are also a few drawbacks to consider before applying.
- High-interest rates. Private lenders are placed at higher risk than traditional lenders because of the less stringent lending criteria that borrowers must meet. In exchange for this higher risk, private lenders charge a higher interest rate than conventional lenders, making these loans more expensive.
- High fees. Private lenders charge separate fees to secure their investment. As such, you’ll likely pay higher fees to take out a mortgage with a private lender compared to a traditional lender.
When Should You Choose A Private Mortgage Lender?
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 require your payments terms to be more lenient
- If your income debt ratio is significantly too high
- If you’ve recently filed for bankruptcy and find that it’s hindering your ability to get a mortgage
- If a past life event has drastically affected your credit score and is restricting you from getting a mortgage from a more traditional lender
- If you want to purchase land or a house and don’t have enough cash to cover a down payment
- If you have a lower than average income or a none-traditional income source and you find it’s affecting your ability to qualify
- If you want to obtain a second mortgage to finance a renovation
- If you wish to purchase a unique property
Things To Do When Working With Private Lenders
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
- Ask questions. If you were to meet with a traditional lender you would more than likely ask lots of questions and make sure that you understood all the terms. So do the same with a private lender, they will be more than happy to answer all questions you have and ease any of your concerns.
- Be prepared. Do you research, check for reviews online and make sure the private lender you choose is the best fit for you and your mortgage needs. Have a good understanding of your finances and know what you’re willing to accept and what you won’t accept. Your private lender will be prepared to meet with you, you should be too.
- Understand the costs. A mortgage comes with fees and extra costs, no matter who you choose to borrow from. So the best thing you can do for yourself is know what those fees are before you make your decision. All lenders whether they are private or institutional have their own set of costs, so don’t choose a lender unless you’re comfortable with what they’re offering you.
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.