Should I deal with a private lender is a question more and more people are facing in tough economic times. The majority of individuals looking for mortgage financing consider two sources…banks or credit unions (aka “A Lenders”). If they get declined they hit an immediate road block in terms of what to do next. Some individuals are smart and seek out additional advice from Mortgage Brokers and in many cases that move pays off. Mortgage brokers have access to a variety of different mortgage lenders and mortgage products. As part of their product lineup, mortgage brokers also have access to institutional lenders that are not well known in the marketplace but exist to fulfill a certain segment of the market. The big banks and credit unions compete on price day in and day out trying to outbid each other for your mortgage. Having said this, they are only interested in high-quality mortgages: insured by CMHC or Genworth, have a low mortgage to house value, and are well-qualified borrowers.
The institutional lenders (aka “B Lenders”) fill the next level of need for borrowers that don’t quite fit the bank or credit union guidelines. Institutional lenders will have less stringent guidelines for mortgage lending. For example, they may be prepared to approve a mortgage where the borrower has a less than stellar credit history. Some institutional lenders are willing to overlook income confirmation to ensure debt service (this would never happen at a bank or credit union). Having said this, the institutional lenders still have parameters, and usually, if they are willing to overlook one aspect of your application your terms and conditions will change accordingly. For example, if you can’t confirm your income you may have to come up with a larger down payment for the house.
So what do you do if your mortgage broker can’t place your mortgage at a B Lender? Or what happens if you are facing foreclosure? (NOTE: in foreclosure cases, NO A or B Lender will knowingly approve a mortgage application to a borrower who is facing foreclosure)
On occasion, if a mortgage broker is well connected, he or she may have access to a network of Private Mortgage Lenders (“C Lenders”) that may be able to provide mortgage financing. The majority of private mortgage lenders are equity lenders. This means, they don’t pay any particular attention to the creditworthiness of the borrower.
For example, banks or credit unions assess the borrower on the following criteria (the five Cs of credit):
- Character
- Capacity
- Capital
- Collateral
- Conditions
The Private Mortgage Lender is primarily concerned with 2 of the 5 Cs of credit:
- Capital,
- Collateral
In other words, Private Lenders are only concerned with the value of the property being financed and the amount of equity the borrower will have to put towards the deal. Most private mortgage lenders will only lend up to a maximum loan-to-value of 75%. For example, if your house is worth $200,000. a private mortgage lender will lend up to $150,000. Furthermore, virtually ALL Private Mortgage Lenders charge a fee ranging from 3-5% of the mortgage amount requested and is normally deducted from the available equity. Therefore, in the prior example of a $150,000. mortgage request after fees you would have approximately $143,000. available.