When it comes to mortgages, banks typically have the lowest interest rates and longest terms—but not everyone can qualify for a mortgage, especially if you’re already invested in several other properties, or your credit is less than stellar. That’s when private lending can save the day.
Table of Contents - Need Money for an Investment? Private Mortgages Could Be the Answer
- What is a private mortgage?
- What type of investment is best for private lending?
- How to qualify for private mortgages
- Benefits of using private lending
- A word of caution about private mortgages
- The bottom line
- How to Apply
- How the Private Mortgage Process Works from Beginning to End
Instead of getting a loan through a bank, private lending offers the opportunity to work with individuals or companies to secure financing. If you’re in search of an easier way to fund your next investment, a private mortgage could be the key to your success.
What is a private mortgage?
Private mortgages go through individuals or companies rather than banks. Anyone with money can finance a private mortgage: you can go through specialized companies, angel investors or even your friends and family. As long as the terms and rates are fair to everyone, a private lender can provide opportunities you might not have with a traditional bank mortgage.
Not every private mortgage will be a suitable source of funding, so you must examine the terms carefully. The goal—for both sides—is to minimize risk while providing a benefit for everyone involved. That might look like a short-term loan with higher rates for a fix-and-flip, or more like a traditional mortgage, thanks to a generous family member.
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What type of investment is best for private lending?
If you’re getting a property for a primary residence and you don’t have any issues with income and credit history, you would probably never consider a private mortgage. Traditional banks will be much more likely to offer a good deal.
For real estate investors, however, private lending is a great way to get bridge funding, come up with the cash for fix-and-flips, construction loans and more. You can use private mortgages for just about any type of real estate, including vacant lots, commercial developments, single-family or multi-family homes and agricultural lots.
If you seek private lending, be sure to look for a lender who specializes in the type of loan you need. Private lending tends to stick to a specific niche. Investors with multiple kinds of properties may not be able to use the same lender for commercial developments as they would for residential mortgages.
How to qualify for private mortgages
Private lenders are less concerned with credit history and income than they are with collateral or equity. For example, you might need to show them your plan to flip the property, pay for it by selling another property or qualify for another type of lower-interest financing. When researching private lenders, make sure you understand what they can accept, and choose accordingly.
Once you’ve shown them your detailed plan, the lender may request an appraisal—both on the property as it is, and the maximum value it could gain from your improvements. Once those numbers are determined, they can decide how much the maximum loan amount should be.
Benefits of using private lending
It’s easier to qualify. Obviously, the biggest benefit of private lending is that it’s much easier to qualify for loans. For example, if you’re self-employed, it’s hard to prove income in a way traditional banks appreciate. Not having to worry about credit score, multiple loans and other traditional limitations helps investors fund new projects. Private lenders have their own criteria, which is usually more efficient than working with a bank.
They’re faster to obtain
Speaking of efficiency, private mortgages may only take a few days to approve. If you’re pressed for time and need to make an offer on a hot property, private lending can make it possible.
Pass the fees on to buyers
Although private mortgages typically have higher interest rates, fees and shorter terms, they’re ideal if you plan to sell the property right away—you can pass the higher costs onto the buyer, folded into their purchase price.
Lenders stand to make more
Of course, professional lenders benefit, too. They stand to make more from the interest rates and fees, which makes them attractive investments. The only exception, of course, is if a friend or family member is the private lender. They may cut a better deal because they trust the borrower.
A word of caution about private mortgages
Granted, private lenders come with drawbacks, too. Both borrowers and lenders (if they have a relationship outside of the loan) need to consider that it could affect their relationships, especially if the borrower defaults. (No one ever thinks that it will happen, but it destroys friendships, professional associations and family relationships when it does.)
Borrowers should consider what they’ll do if their financial circumstances change, too. For example, if they lose their income source, don’t qualify for lower interest financing or can’t sell the property, they may find themselves in big trouble. (The COVID-19 pandemic is an all-too-familiar example—no one could have predicted a global pandemic and the layoffs that ensued.) In other cases, they may find that their property values fall. When you can’t sell for the amount remaining on the loan, you could find yourself on the hook for tens of thousands (or more) at a much higher interest rate. That can be devastating, especially to newer investors. Make sure that you have a viable backup plan in case the worst happens.
If you decide to use a private lender, make sure that you carefully review the agreement. What happens if you miss payments? Can you prepay? Is there a prepayment penalty? How will the loan be secured? Are there grace periods? If you use a real estate attorney, have them ensure everything is in order before you commit.
The bottom line
Private mortgages are a great source of funding when, for whatever reason, traditional mortgages are unavailable. However, their potential for great reward comes with a significant amount of risk. Before entering any private loan agreement, make sure that you fully understand the terms—and ramifications—involved.
How to Apply
If you're looking for a private mortgage in Ontario, we recommend LendCity Mortgages. They have access to private lenders across Ontario and Canada wide.
Visit them at lendcity.ca
Or call at 519-960-0360
How the Private Mortgage Process Works from Beginning to End
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