A private mortgage is an alternative source of financing given to a borrower by a private lender, and is usually sought after when a traditional bank or lending institution will not approve a borrower for a mortgage or a home refinance loan. They are usually short-term interest-only loans ranging from 6 months to 3 years. At Clover, our experienced mortgage agents specialize in finding the best private lender who will offer you the right option for your needs and specific financial situation.
Private lenders understand that the guidelines used by the banks and other traditional lending institutions may be too stringent, and that in many cases banks turn away borrowers who are actually capable of paying back their mortgages. Unlike banks, private lenders place a larger focus on the value and over condition of the property, instead of simply looking at the borrower’s credit and income.
A borrower will often try getting a mortgage or refinance their property by making contact with their bank first. These days this is a hard feat to accomplish. If their banks turn them away due to bad credit, high debt that may be in arrears, low or non-traditional income, or other issues, then they would contact a mortgage broker and try to get approved at an alternative lender, also known as a B lender, through the services of a professional mortgage broker. The exit plan is important here because a mortgage broker should never put a client into a mortgage that they will likely not be able to afford.
A B lender would charge higher rates than a traditional institutional lender, but the fixed rates will still be lower than in a mortgage from the private sector. Examples of B lenders include trust companies and certain credit unions. If the borrower has a severe problem with their credit and is declined by a B lender, they would then turn to one of many private mortgage lenders that are accessible through your Clover Mortgage agent and broker for a short term private mortgage.
A 1 year term is most common when it comes to a private mortgage. If this is a problem for you and a shorter or longer term might be a better choice, those types of private mortgages are available through certain mortgage lenders who lend using their own private funds. Terms start from 6 months for a private home loan and can be as long as 3 years for a private first mortgage, second, or third mortgage depending on the lender.
A private mortgage might be an ideal short term solution for someone who almost qualifies at a B lender but might need some time to either build up their credit, save up a larger down payment, or grow their income and net worth. In this case, private is the way to go.
Unlike traditional lending institutions, private mortgage lenders lend primarily based on the value of the property, the equity remaining in the real estate, and they even take into consideration the city where the property is located in.
Not all lenders need to be licenced. Private lenders such as individuals, a group of individuals, or a corporation. Those individuals or groups, depending on the circumstances, do not have to be licenced to lend their personal funds for mortgages in a larger city such as Toronto, Ottawa, Ontario, or most other parts of Canada.
There are many reasons why borrowers require the help or a private lender. Here are some of the most common reasons why you would turn to Clover Mortgage for a private mortgage :
Here are the 3 most common types of private lenders:
Individual lenders: When an individual is investing their own personal money towards private lending, they are considered to be an individual lender.
Syndicate investors: When a group of investors invest their personal funds as a group into one mortgage, it is considers a syndicate mortgage.
Mortgage investment corporation (MIC): When a group of investors pool together their personal funds and make them available to invest into several different mortgages at simultaneously, provided that the borrowers meet specific criteria to qualify for the loan, this is known and a Mortgage Investment Corp.
With most private mortgages, the borrower only needs to make the monthly interest payments instead of a blended monthly payment that includes both interest and principal. This helps keep the monthly payments lower and more affordable.
In some cases you can even choose to have no monthly payments at all by either pre-paying all of the interest when the loan is originally funded and having that amount deducted from the total loan amount.
You can also choose to defer all of the monthly interest payments until the very end of your loan term, this is called an accrued interest private mortgage.
A less common option is an amortized blended payment plan that allows you to to blend both interest and principle into the monthly payments, similar to a more traditional mortgage, so that you can build up additional equity in your home. With a blended amortized private mortgage you can have the payments calculated based on an amortization term for as long as 40 years in order to keep the monthly payments lower.
Most private mortgages are short-term loans lasting as little as 1 month to as long as 3 years. This means that at the end of the term the full amount of the mortgage will be due, or you may have the option to renew the mortgage with the current lender. Repayment of a private mortgage is usually done by refinancing the entire private mortgage with a different lending partner.
At Clover Mortgage, our goal is to help create a plan that will help you get out of your private mortgage as quickly as possible and into a more traditional mortgage at a much lower interest rate. We will even help you find the right lender as your private mortgage approaches the end of the term.
Interest rates for a private mortgage depend on a variety of factors including the loan amount, the value of the property, the location of the property, and other factors. Private mortgage interest rates start as low as 7.99% to as high as 13.99% for a private first mortgage and as low as 8.99% to as high as 15.99% for a private second mortgage depending on the different factors that matter to the specific lender.
Individual private investors typically have the ability to offer better interest rates than a MIC because a MIC needs to provide a higher rate of return to their investors while also leaving extra interest to pay themselves.
Since private lender usually charge higher interest rates than conventional mortgage lender, borrowers would only seek out a private lender when they get turned down by the banks and by other alternative lenders such as Duca Credit Union, Equitable Bank, or Hometrust.
Here is a simple example that will illustrate how you can calculate what your interest payments will be on a private mortgage loan.
Let’s pretend that you are a homeowner and you need to borrow $300,000 to buy or refinance your property that is valued at $400,000 and the bank turned you down because you either have poor credit or are self-employed and have a non-traditional way of declaring your income. You came to Clover Mortgage and we shopped around for the best private mortgage rate and were able to get you approved for 5.5% on a private first mortgage for a 1-year term with interest only payments. To calculate how much your monthly payments would be, you would use the following simple formula:
Monthly Payment and Interest Calculation Formula:
Monthly Payment = Total Interest Amount for the Year ÷ Number of Months in the Mortgage Term
Step 1 : Calculate the total interest for the year
Total Interest Amount for the Year = Annual Interest Rate x Total Mortgage Amount
Total Interest Amount for the Year = 5.5% (monthly interest rate) x $300,000 (total mortgage amount)
Total Interest Amount for the Year = $16,500
Step 2 : Calculate the monthly payment amount
Monthly Payment = $16,500 ÷ Number of Months in the Mortgage Term
Monthly Payment = $16,500 ÷ 12 months
Monthly Payment = $1,375
These calculations show that at the end of the 1 year term you would have paid a total of $16,500 of interest by making 12 monthly payments of $1,375 a month. You would still owe the entire $300,000 in principal back to the lender and Clover Mortgage will help you either refinance at a better rate or renew. We typically recommend starting the renewal or refinancing process 3 to 4 months before the end of your mortgage term so that we have enough time to find a lender that will offer the best possible solution to you given your updated financial situation.
If you have a credit score that is below 580/600, you are likely not going to be approved by a prime lender like a bank, and even institutional bad credit lenders will likely deny you a mortgage. Luckily you can turn to private lenders who provide many different mortgage solutions for clients who have bruised credit, bad credit, and even horrible credit. Clover Mortgage can help you find the best private lender for your specific financial situation that will provide you with the most competitive rate, though it will be higher than what you would get from a bank if you were to have a very strong credit history.
Here is a simple example of how to calculate the Loan to Value, which we in the mortgage world call the LTV, for the purposes of understanding how large of a private mortgage you might be able to qualify for. The LTV takes is calculated the same way regardless of whether you mortgage is private or not and it takes into consideration the total loan amount in comparison to the home equity remaining in the property. Most lenders have a maximum loan to value and minimum available equity when dealing with mortgages like this. This is to ensure that you have enough interest in keeping your home and not defaulting on payments.
Whether you want to buy and are financing the purchase of a home or refinancing the mortgage of a home you currently own through the mainstream or private channels, it is important for you to understand how to calculate the loan to value amount to understand what lenders will be most likely to give certain kinds of mortgages. This is important because every lender has a maximum loan to value that they will lend against when refinancing or financing a property. The loan to value or LTV of your home is the amount of principal that is outstanding on your mortgage versus the total value of your property.
To calculate this for a private first mortgage you would simply need to take the total amount of the mortgage and divide it by the value of your property and multiply it by 100 as in the example below:
Property Value: $500,000
Total Mortgage or Refinance Amount Requesting: $400,000
Loan to Value (LTV) = $400,000 divided by $500,000 and multiply by 100 = 80%
In this example, Clover Mortgage will find a lender who is comfortable lending up to 80% of the value of your home. The remaining 20% is your home equity, also known as the equity portion of your home that you own. To most lenders in the private mortgage world, this is an acceptable LTV to lend on.
Banks and other institutional lenders pay Mortgage Brokers a commission on every mortgage that the brokerage gets funded from them. Private lenders, however, do not pay the brokerage any commission and therefore that fee is passed along to you. Also, because private mortgages typically carry more risks to the lenders, private lenders will charge an additional lender fee to the borrower along with a small legal fee incurred by the lender. Depending on the loan amount, the borrower might be required to use the assistance of their own lawyer to represent them in the transaction.
The total fees that you can expect, including the lender and broker fees, but excluding the legal fees can range from a little as 2% to as much as 10% of the total loan amount, depending on the size of the loan, the complexity of the deal, and the risk to the lender.
The good news is that in most cases, these fees are subtracted from the loan when it is funded to ensure that you do not go out of pocket to pay for these costs.
For example, if you are applying for a $100,000 private first or second mortgage and the lender and broker fee is 4% in total, plus the legal costs amount to $2,000, then your total closing costs on the mortgage would be $6,000. In order to cover these costs, you would simply apply for a mortgage of $106,000 instead of $100,000, so that all of the closing costs are paid directly by the loan rather than out of your pocket.
Today’s private lenders tend to specialize in specific types of loans and lending categories.
Not every private mortgage lender will lend on every kind of property. Some lenders prefer to lend exclusively on properties located in larger cities where other lenders might prefer to lend exclusively on properties located in smaller rural or more remote communities. Some lenders prefer lending exclusively on residential properties, some private lenders have the power to lend exclusively on commercial properties, while many lenders prefer to have a mixture of residential and commercial properties in their investment portfolios.
Many mortgage lenders who specialize in private mortgages will lend exclusively based on the property itself and the home equity that is available when refinancing or financing a home. Some others will take into account the profile of the borrower when making their decision to approve, or when assigning an interest rate for the mortgage. There are lenders looking to lend larger amounts of money, in the millions of dollars, and others will only fund smaller loans. Your needs and property value will help determine which kind of private lender your mortgage broker will suggest.
Here are some of the most common areas that private lenders specialize in:
Unlike a traditional mortgage from a bank which can take many weeks or even months to get approved and funded, an approval for a private mortgage can take less than a day in some cases and in certain situations you can have your money within 48 hours if it’s a simpler deal. The average length of time that it takes to get approved and funded by a private lender is from a few days to up to 3 weeks on average.
The goal of a private mortgage lender is to have the borrower improve their situation over the term of the mortgage and be in a position to refinance the entire private mortgage to a prime or more traditional lending institution. Since these loans are short-term loans, and private lenders are not nearly as regulated as the banks are, private mortgage lenders are able to make much faster financing deals, but they also want to be able to collect their return on investment in a much shorter period of time. This is why in many cases these lenders will try to work to help their borrowers move into a better financial position to be able to transition on to a prime lender.
Qualifying for private mortgage loans in Canada is typically a much easier and quicker funding option than looking to qualify at a bank or other more conventional lenders. Also, in many cases in Ontario, because the monthly payment is based on solely on interest, your monthly interest payment will be lower than a traditional mortgage, although you will not be paying off any principal.
Since traditional mortgage lenders such as banks and B lenders have to comply with strict regulations when analyzing applicants for mortgages and enforce the mortgage stress test, which you can read more about on our stress test blog, imposed by the Canadian government, more and more borrowers are turning to mortgage brokers to gain access to lenders for private first mortgages or private second mortgages using the equity they have in their homes.
In a city like Toronto and other growing parts of Ontario and Canada where the possibility to buy a property has become nearly unaffordable for the average Canadian, a private first or private second mortgage is becoming more and more common. This is because for the most part, unlike many of the conventional mortgage lenders, while lenders in the private mortgage market do take a borrower’s credit history, current debt situation, payment arrears, and income into consideration, they should be used as a temporary solution to help put borrowers into a better future situation.
Even with bad credit, qualified and experienced brokers can get you a quick approval from most private mortgage lenders. Depending on which specific lender your expert mortgage agent recommends, they might lend primarily, if not exclusively, on the value and marketability of the real estate itself. That is one of the main advantages of going private. Their interest is strictly based on a few easy to assess factors.
Private lenders will give a mortgage on deals that banks see as being too risky. Because of these risk factors, these lenders place an emphasis on different factors than the banks do.
Here are what most private lenders deem to be important factors when analyzing a potential borrower and the mortgage that they are requesting:
Property value and type of property being mortgaged: To most private lenders this is the single most important factor that a private lender considers when determining whether or not they should approve a borrower for a private mortgage. The property value, type, and condition all play a role in minimizing the risk to the lender, especially if the borrower has bad credit or poor credit, and helps ensure that the private lender will be able to recoup his investment.
In order to pass this test, the property should be in good condition and in most cases a third party appraisal is required, thought certain lenders that Clover Mortgage works with will forgo a formal appraisal and are willing to conduct a physical inspection themselves if the loan to value is low enough. This will help expedite the process and will end up saving you on the appraisal costs.
Down payment and loan to value (LTV) for new purchases: In most cases private lenders will not give a mortgage on a property that has a loan-to-value that is higher than 75% to 80% which means that you will need to have at least 20% to 25% available to put as a down payment for the property. In fact, many private mortgage lenders will not go higher than 75% or 80% LTV. At Clover Mortgage, we have built long lasting strong relationships with several private lenders who will give a private mortgage on properties with a loan-to-value as high as 80%. This of course depends on a variety of factors such as location, marketability and condition of the property, and more.
If you have the ability to invest a larger down payment then it is usually recommend that you do so to save on costly interest payments. A larger investment from your part also shows the lender that you are willing to have more “skin in the game” and therefore it makes the private lender feel more confident in granting your a private mortgage at a lower interest rate. The lower the risk to the lender, the lower the interest rate and fees become, therefore it is usually advisable to provide a larger down payment if you can afford it.
Equity available for refinancing or second mortgages: When refinancing your property or adding a second mortgage or third mortgage some private lenders will allow you to go as high as 80% loan-to-value in some cases, though most private mortgage lenders will only refinance up to 80%. Because Clover Mortgage has many established relationship with some of Canada’s leading private lenders, several of the private lenders who we work with will refinance and provide 2nd and 3rd mortgages up to 80% loan-to-value. For example if your property is worth $500,000 and you wish to refinance $400,000 then you will be finance up to 80% loan-to-value (a private mortgage loan of $400,000 is 80% of the total value of the $500,000 property).
Income (ability to make the monthly payments): Unlike banks, private mortgage lenders are much more accepting of both conventional income and less conventional income such as self employed workers or business owners, or commission based employees who report their earnings in non-traditional ways. Conventional income often times comes in the form of a regular annual salary or hourly wage and can be proven using the borrower’s Notice of Assessment (NOA), paystubs, and T4’s. Since non-traditional income is reported differently, it can be a little more difficult to show proof of income and the lenders need to accept certain estimates using a variety of information that banks tend to shy away from.
In addition to the technical points above, here is a list of a few additional behaviour tips that can help you get approved for a private mortgage:
Please read our blog about private mortgages to learn more.
Unlike a traditional bank mortgages that requires that every borrower applying for a mortgage loan is subject to a formal credit check, a private mortgage lender will often times forgo the credit check when financing a private mortgage. That means that even borrower who have bad credit can qualify and receive a fast approval for a private mortgage.
However, if you wish to get the best possible fixed rate on a private first or private second mortgage, then in certain instances being able to display that you have a strong history of making your monthly payments on time can help a private lender feel more comfortable with granting you a private mortgage.
A history of bad financial decision making will make a lender weary. When a lender is more comfortable with the borrower and the property, then there may be more wiggle room for your broker to negotiate a better mortgage interest rate on your behalf.
Over the past few years banks have been increasingly pushing their customers into collateral charged mortgages. What this mean is that even though the bank may have only given you a mortgage of $300,000 on a home that is worth $400,000, they registered your loan as being in the full amount of $400,000 or sometimes even more than the current value of the property.
This added security for the bank ensures that you won’t be able to get a second private mortgage anywhere else unless the value of your property grows tremendously. This means that you are most likely stuck only being able to turn to your bank when you need to refinance or take out additional money using the equity that you have in your home.
Mortgages like this tend to be a last resort or a temporary financial solution in many circumstances. It is important to have all of the facts when making this kind of call. When it comes to consolidation of debt or when a person’s credit history, income or employment is an issue, this is in certain circumstances the right choice for someone in that position to get a mortgage.
Here is a list of some of the main benefits and cons about getting a private mortgage:
Now you might already know that a conventional mortgage lender, such as a bank, will often times offer their mortgage customers lower rates. However, a private mortgage lender will offer much faster approval times and lend to a borrower regardless of potential past or current credit issues. In many instances, private mortgage lenders can fund a mortgage as fast as 48 hours from the time that a borrower submits their mortgage application.
More often than not, when a borrower goes to a traditional mortgage lender, like a bank, they leave with a bad feeling of stress and anxiety because the process for getting approved for a mortgage from a bank is very tedious, long and time consuming. The number of documents required and the level of scrutiny that banks are required to put their mortgage customers through can be overwhelming. These days, given the strict regulations and mortgage stress test that the banks are required to follow, even after weeks or months of constant back and forth, many borrowers are getting declined by the banks.
Because a private mortgage lender is not required to follow such a tedious process, it is much easier, and takes significantly less effort and time to get approved through the private mortgage channel. Another big advantage to going private is that the terms that these mortgage lenders offer to their clients are more flexible and customizable to the needs of the borrower. Banks have very limited mortgage terms that they are able to offer.
Whether it is a private first mortgage, a private second mortgage, or even a private third mortgage that you require, private lenders can be a great alternative when the banks are unable to help you.
At Clover Mortgage, our brokers and agents know how important it is for you to get you approved for the right mortgage for your needs. We specialize in helping customers get a mortgage even when they are turned down by their banks or if they need the cash quickly and do not have the time to go through the drawn-out application process that banks require. We have access to over 40 different lenders and over 100 different mortgage products that we can offer. Finding the right mortgage solution that’s right for your needs, your specific financial situation, and your plan.
In many cases, people want to turn to private mortgage loans when they either cannot qualify for a mortgage at a bank, need a second mortgage, to stop a power of sale, or are in rush and do not have the time to wait for a bank to process their mortgage application.
Depending on certain factors and due to an increased risk to the investor, the interest rate for private first mortgages start as low as 5.99% a year and grow from there. If you qualify for a rate of 5.99%, that is almost as low as some B lender rates. When it comes to a private second mortgage, rates start as low as 7.99% a year and go up from there. Your rate will also depend on the city or place that you property is located in.
At Clover Mortgage we offer private mortgage solutions at competitive rates starting as low as $30,000 and as high as tens of millions of dollars depending on the value of the property and certain other factors.
Yes! At Clover Mortgage we specialize in helping people who are self employed get a mortgage. Because the income verification process is much easier through a private lender, a private mortgage is often the best solution for someone who works for themselves. Many B lenders also have mortgage solutions for self employed borrowers.
Most private mortgage are taken for a 1 year term, though terms as short as 6 months and as long as 3 years are available through some lenders. The rates may be slightly higher for a shorter term mortgage. If you might want a longer mortgage term, ask your Clover Mortgage broker about the different services we provide and the various term options that might be available to you.
Clover Mortgage specializes in brokering services for both commercial and residential private mortgage loans. We have two separate divisions that have individual expert mortgage agents and brokers who each specialize in either commercial mortgages or residential mortgages. We offer some of the most competitive rates and options on terms for both commercial and residential mortgages.
In many cases, you can get approved for a private mortgage the same day that your mortgage broker receives your application.
Once you get your approval, and depending on certain factors, brokers can help get your cash as quickly as the next day.
You can submit your private mortgage application in person at a Clover Mortgage office, by email, or by fax. You can call or text us anytime at 416-674-6222 to speak with an experienced mortgage broker.
As with a traditional mortgage, you will be considered to be free of your mortgage once it is paid off completely and you no longer have another mortgage on your property.
No. It should not be news to you that the contracts are written by lawyers, they carry a copyright. Therefore, every private mortgage lender has a unique agreement drafted. This is why it is important to go over your agreement with a lawyer.
All of your fees will be disclosed to you in the original quote and mortgage offer, before you sign or commit to taking the mortgage. Legal fees can typically range from $1,500 to as high as $3,000, and even more depending on the complexity of the deal. Depending on certain factors, you should also expect to pay as little as 3% to as high as 10% in additional fees for a 1 year term private mortgage.
These fees will be deducted upon closing form the total advance of the actual mortgage funds. These fees are divided between the lender and the broker. In some cases an appraisal or inspection by the lender will be required. The lender inspections typically start as low as $250, while full appraisals will start as low as $400 and go up from there. For the most part, you will have to pay for an appraisal directly. Any other fees will be disclosed up front and you will never be surprised by a fee upon closing. When it comes to the renewal of your mortgage, your lender may choose to charge an additional mortgage renewal fee.
In many cases, you can get approved for a private mortgage the same day that your mortgage broker receives your application.
It is no secret why borrowers are finding it much more difficult to get approved for a mortgage these days. Since much tougher mortgage qualifying criteria was introduced at the banks in 2018, the mortgage market has seen a spike in borrowers and homeowners turning to private mortgages. It was reported in the news that 20% of homeowners who took out a home refinance in the second quarter of 2018 were funded by private mortgage lenders. That is a 67% increase over the first quarter in 2016.
This jump in the need for private mortgages is due to a combination of new policies including the mortgage stress test, rising interest rates, and high home prices in a major city like Toronto, Mississauga, Ottawa or other parts of highly populated parts of Ontario. These days it seems like it is nearly impossible for borrowers to get approved at their banks.
The appeal of getting a private mortgage now is a mixture of how quick and easy it can be to get approved for a private mortgage. Despite the higher interest rates that come along with a private mortgage, many borrowers are choosing private mortgages because they have no other choice as a good alternative source of funding.
The percent of mortgages that were funded through private lenders increased to over 20% in 2018 from only 12% in 2016. 2019 has been another strong start to the private mortgage lending industry in Canada. Our team at Clover Mortgage call for a continued growth in the private mortgage world through 2019 and beyond, as borrowers are finding it more and more difficult to get approved for a mortgage at their banks.
Another interesting fact is that over 40% of these private mortgages were taken out by people in their 30’s and 40’s. The top majority of these private mortgages are taken for a term of 1 year. Of these homeowners, many have mortgages exceeding the more traditional 80% loan to value leaving them with little equity remaining in their properties. Also, when looking at those generations, a good number of people are submitting their mortgage applications through email as opposed to in person, which used to be the trend.
At Clover Mortgage we pride ourselves on providing the highest level of customer service when finding the right private lender to service you, and negotiating the lowest fixed rates that we can on behalf of our clients. We provide you with top solutions that fit your needs. We do our best to bring you good news about your mortgage application.
*Rates start as low as 4.49%
*Rates are subject to change. Terms and conditions may apply.
We pride ourselves on quick, easy & honest service. Our clients always come first.
We specialize in dealing with bad credit & bank declines. We turn a “no” into a “YES!”
*No credit checks. No complicated application and no income required!
*Terms & conditions may apply.