What is Private Financing?
A private mortgage is an essentially an alternative source of financing given to a borrower by a private lender.
Private mortgages should never be a long term solution and should only be entertained for periods of 6 to 24 months. Private mortgages are meant to be short term solutions bridging the gap between the period of when a borrower may not qualify for traditional lending to when they can qualify for traditional lending. A great Mortgage Broker will always have an exit strategy to get the borrower out of private financing and into traditional lending.
How does a private lender differentiate between a B lender or lending from a bank? Private lending can be anyone with excess funds who is looking to generate interest on those funds by lending to a borrower in need of private monies. A private mortgage is usually sought after when a traditional bank or lending institution will not approve a borrower for a mortgage or a home refinance loan.
Private lenders almost always charge a fee for lending you their monies (lender fee). These fees vary from lender to lender and are often negotiable. Mortgage brokers have access to a multitude of private lenders ranging from individual lenders (someone with extra money looking to generate interest) to a Mortgage Investment Corporation (MIC). MICs are pools of capital which invest in private mortgages in Canada. To break it down further, MIC’s entice investors to invest their funds into the corporation for a return; usually in the form of an interest rate guarantee or dividend.
Now, private mortgages are not for your average borrower. But, can be very useful when you cannot obtain financing from traditional lenders like a bank or B lenders. Just to name a few, some scenarios in which you would seek private financing include:
Borrowers don’t qualify due to: bankruptcy, consumer proposal, poor credit, or income
Property type is not traditional or has problems
Houses purchased for the sole purpose of tearing down
Construction financing
Non-traditional income (for the borrower)
Commercial financing (in some cases)
Mortgages on land only
Not enough time to get a mortgage traditionally before closing
Need more money than 80% Loan to Value
For more questions on Private Financing or if you or someone you know is in a private mortgage and can’t seem to get out; please contact me to discuss the specifics and I will be happy to assess your situation and provide multiple avenues to either obtain better rates/terms or get out of private financing altogether!
