Private mortgage lenders how to use successfully | Ingrid McGaughey | toronto mortgage broker

Private mortgage lenders: how to use them successfully

Private mortgage lenders how to use successfully | Ingrid McGaughey | toronto mortgage broker

If your mortgage broker suggests a private lender mortgage, you’ll probably have many questions. That’s a good thing! In order to use private lenders successfully, you need to make sure you understand how this choice will work for you. Just as importantly, you need a plan for how you’ll move on and replace the private lender with a more long-term solution.

Here are some questions to ask before working with private mortgage lenders

  • Why do I need a private mortgage?
  • Why do private lenders have higher interest rates?
  • What other costs can I expect?
  • What happens a year from now when my private mortgage term ends?

Why do I need a private mortgage?

There are many situations that might make a private mortgage the right choice for you. They include the following:

  • Your income is too low to qualify for the mortgage amount you need with a traditional lender
  • Your credit score is below the threshold for A or B lenders
  • You don’t yet have a two-year history of contract income, part-time income, or self-employment income
  • You receive a lot of your income in cash
  • Traditional lenders can’t get you a mortgage quickly enough
  • You are experiencing a temporary loss-of-income issue such as a job loss
  • You are planning to “flip” the property and currently it is in rougher shape than most lenders are comfortable with

Why do private mortgage lenders have higher rates?

A mortgage broker will typically suggest a private lender if they haven’t been able to place your mortgage with a mainstream lender or an alternative lender. This means that your application is considered riskier than the scenarios these lenders would be comfortable with. The private mortgage lender will charge you a higher rate as a trade-off for the higher risk they are taking on when lending the money to you. Private mortgage rates are determined by aspects of your application including your property, your income, your credit score, and how much mortgage money you need.

What other costs can I expect with a private mortgage?

Your mortgage broker should walk you through all the costs you can expect in obtaining the private mortgage. You will almost certainly need to cover the cost of an independent, professional appraisal of your home. In addition to your own lawyer, you will be responsible for covering the costs of the lender’s lawyer too. Additionally, there are typically both lender fees and brokerage fees. All the costs added together show the true cost of the private mortgage, and your mortgage broker can explain these thoroughly to ensure you don’t encounter any surprises.

What happens when the private mortgage term ends?

As you might have noticed in reviewing the scenarios in which a private mortgage would make sense, this type of lending solution is intended to be a temporary one. Private lenders will ask you about your exit strategy. In other words, they want to know how they will be paid out, and you need to have a game plan in place which will allow you to do so. Your exit strategy will be related to the situation that caused you to choose a private mortgage in the first place. For example, if you chose a private mortgage because you were temporarily jobless, the plan would be for you to be job hunting and hopefully fully employed before the term ends. You would then refinance your mortgage to pay out the private and move to a traditional or alternative lender.

Get in touch!

If you would like to chat about your mortgage options in more detail, please don’t hesitate to reach out for a free consultation with me!

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