While it’s possible for consumers to directly access some private mortgages, most borrowers looking for these types of funds go through a mortgage broker who has connections to a wide variety of private mortgages and investors.
To find a mortgage broker, try asking for recommendations from other real estate investors or check with your bank to see if they know any brokers who deal with private funds. Once you’ve found someone, asking lots of questions and making sure they have adequate experience.
A client should interview several mortgage associates and see what kind of history they have in private lending and then, just like they would with any trade, they should do their due diligence in determining how good the mortgage broker is at Private mortgages.
After you’ve nailed down a mortgage broker, they will want to know the purpose of your loan (purchase, consolidation, bridge financing, construction, etc.), the plausibility of the loan (as determined by details on the loan application) and your chances of being able to make the loan payments on time. They will structure the deal and help plan an exit strategy so the borrower won’t have to stay in a private mortgage for a long period of time. It’s also important to note that some private mortgages will renew after a one- or two-year term if the payments are good and the borrower needs to stay in the mortgage for longer.
Whatever the scenario, borrowers of private mortgages need to be aware that the extra costs will need to be considered before proceeding. If it is because of bad credit that you using a private mortgage then you must also take steps to fix the credit issue before the end of the term. Brokers for Life works closely with Parley Consulting to help our clients get back on the right financial track and get into a regular mortgage when they are done.
Whatever the case, knowing the private money option is available is helpful when navigating the stricter CMHC rules and added restrictions for real estate investors and self-employed borrowers. Understanding it as a short-term solution can make the extra costs easier to swallow – especially if it means acquiring a great property that might have been out of reach without the help of a private mortgage.
Three tricks for working with private lenders:
- Be cautious. Don’t rush when you’re signing a contract and make sure you feel comfortable with the terms. Ask questions to your broker, and if it’s a smaller private lender, don’t be afraid to ask for references. Also, make sure your lawyer reviews your contract before signing anything.
- Plan your exit strategy. With your broker, plan how to secure other financing in a relatively short period of time – private mortgage lenders don’t want to be tied to a mortgage for more than a year or two, so the idea is to use them as a “bridge” on the way to a more traditional lender with lower interest rates.
- Know the costs. Private mortgages and mortgage brokers will both charge fees for private deals (generally two to three per cent of the loan) and there are also legal fees. Remember to factor these costs in your budget and get percentages in writing. Also be sure to check what the exit fee (or prepayment penalty) is so you know what to expect if you decide to pay out the mortgage before the term expires. And discuss an exit strategy for your private mortgage with your mortgage broker.