Getting approved for a mortgage can be a challenging task. For the full list of requirements and to learn the best options you have — you can go here. Even if the big banks and MFCs turn your application down — you can always apply for a private mortgage.
It can save the day if your financial situation and credit history are far from perfect, but you’re sure that you have enough resources to pay for your mortgage in full. Here’s what you can expect from a private mortgage lender — and how to be prepared for applying.
When You Can Apply for a Private Mortgage
In short, you can apply any time, but most people go for it when both A-class and B-class lenders refuse to give you the money. A-lenders are the big banks, with the lowest interest rates and the highest expectations. B-class lenders are the Mortgage Finance Companies, with slightly less strict requirements, but slightly higher percentage. Both will expect you to have a sufficient credit score.
Private mortgages are different. It’s available for people with lower credit score or other issues. Private mortgage lenders can help you out if you have employment problems, have a bad debt-to-income ratio, and other issues.
Private Mortgage Interest Rate in Canada
As for the interest rate, private mortgage rates are usually much higher than A-class mortgage rates. This is due to the fact that private lenders have to take more risks. On one hand, they can make much more money if you succeed and pay your mortgage on time. However, they will lose a lot if you fail to pay your mortgage as agreed.
Nowadays you can expect your interest rate to be between 10% and 18%. It’s a lot more than a big bank would charge, but sometimes — it’s your only chance to get approval.
Private Mortgage Down Payment Requirements
Perhaps the most interesting feature of a private mortgage is the fact that you don’t have to put down a hefty 20% of your property’s price. Instead, you can offer other properties of yours as a down payment. However, they won’t always accept this option, so if you want to get approved — apart from higher interest rates — you need to have at least 10% of your property’s value.
If you want to take a private mortgage, make sure that you have enough money for your down payment. Otherwise, your application will be denied.
Private Mortgage vs Bank
Even though the biggest difference is the interest rate and a private mortgage seems to be way more expensive, it’s not that simple. Sometimes, a conventional loan from an A-lander is just not an option.
You can get a private mortgage, but — most likely — can’t get a traditional loan from a bank, in case:
Your credit score is low
Anything under or around 600 is considered too much risk by the bank’s mortgage underwriters. They simply won’t give you the money.
You’ve had a bankruptcy in your credit history
Even if it’s been a few years since that happened — you need to have an excellent credit score to get approved for a conventional loan from the bank. They will just pass on such applicants, no matter how high your income is.
You’re already in debt
You have too many debts and expenses and you don’t think you can manage them all with your current salary. This is a risk most people take, but banks have strict rules that put you into an “unapproved” category.
Your employer has gone bankrupt
Lenders won’t issue you a mortgage if your employer is in financial trouble. Unfortunately, it’s an area that’s out of your control, but it directly affects your ability to get approval.
You’re self-employed
And your business can be considered too risky for the bank to loan you money. Your income may vary too much from month to month, and so does your ability to pay back the loan.
You want an unconventional house
Smart homes, small homes, RVs, anything that’s not a typical residential area or a condo is considered a bigger risk for the bank because they find it hard to get a real evaluation of your desired property.
How To Get Prepared
In case you see your situation on the list — a private lender might be your best choice. It’s not a guaranteed approval, though: you still need to prove that you’re capable of paying it in full and on time. To increase your approval chances, you can:
- Get rid of debts first;
- Try to raise your credit score;
- Save for a bigger downpayment;
- Get a guarantor, a co-borrower, or a co-signer for your loan.
Finally, make sure that you’ve had all documents checked by a lawyer and compared them to the original ones. Don’t sign anything in haste if you’re not 100% certain that everything is as it should be. After all, your mortgage might affect your finances for years to come, so don’t rush into it.
