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Private Mortgages (BC) - Is it the right solution for you? |
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Mortgage Broker (BC)
Direct Line: (604) 506-0397 Fax: (604) 628-3798 Toll free (Canada) : 1-800-504-5886 Vancouver, Burnaby, Surrey email: johnso@bcmortgage.ca
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Introduction
In the Canadian mortgage market, there are three major classifications of mortgage lenders: (1) Traditional (prime) lenders (e.g., banks, credit unions, mortgage houses); (2) Non-conforming lenders; and (3) Private lenders.You may already know about traditional sources. These would be your chartered banks and credit unions. There are also large mortgage houses such as FirstNational, FirstLine, MCAP, etc. These lenders focus primarily on what’s called in the industry, the “A” market. These lenders focus on borrowers who have good jobs/credit and are purchasing homes within the traditional guidelines.
For borrower’s that cannot qualify under the "A" guidelines, the next option is to try to fit within sub-prime lender’s guidelines.
Sub-Prime (non-conforming) Lenders
With the mortgage meltdown in the US, many sub-prime lenders have been forced to close shop or switch their business to prime lending. During the past year, we saw the likes of GE Money, Accredited Home Lenders, GMAC, Xceed, FirstNational Excalibur leave the sub-prime arena. There are still a few lenders left in this market but they have tightened up their credit requirements and interest rates. The remaining lenders are Wells Fargo, Optimum Mortgage and Firstline Access.Sub-Prime lenders generally provide high-ratio mortgages (i.e., your down payment is less than 25% of the purchase price of the home) for individuals who can show job stability but have credit issues. These lenders charge a premium between 1-3 percent over traditional interest rates.
Sub-prime mortgages don’t work for everyone. Many follow a matrix of rules that need to be met before you qualify. While the interest rates and fees are lower for a sub-prime lender (vs. a private lender), you will find that the documentation requirements can be extensive. Proof of income is almost always required.
Private lenders
If your application still doesn’t fit within sub-prime lender guidelines, a private mortgage is another option. Private lenders will generally require at least 25% equity or down payment and a readily marketable property. For remote or rural properties, many private lenders will often require approximately 50% equity.Here are a few examples of applications that will work only with a private lender:
1) If you are in foreclosure, a private lender may be able to refinance your mortgage so you avoid foreclosure. Private lenders will look at these scenarios but most consider this type of lending to be very high risk. They are essentially taking over a problem from the current lender. Consequently, private lenders would be looking for significant equity (in the 50% equity range).
2) You don’t have proof of income - Sometimes you cannot show the required proof of income or the proof you can provide will not be accepted by traditional lenders.
3) You need a second mortgage to consolidate debt and your credit isn’t good - This is a solution when you have equity in your home (at least 25% after consolidation). This lowers your monthly payments and interest costs. This will allow you to improve your credit score and free up some credit lines for future needs.
4) You’re purchasing or refinancing a commercial property and you cannot show repayment ability (e.g., financial statements) or a track record of income
5) The property you are buying is in a remote area or is raw land (usually 50% equity is required)
terest costs
6) You’re credit score is too low - If you're credit score is below 600, you will find difficulty in obtaining financing in which case, you should consider obtaining a private mortgage.
Players in the private mortgage market
There are three main players in the private mortgage market: (1) the borrower’s agent (mortgage originator); (2) the lender’s agent and, (3) the private lender.Originator
The borrower’s agent (or originator) is a mortgage broker that specializes in finding borrowers. This person will gather the client’s requirements, package the proposal, obtain appraisals and submit the application to the appropriate lender. This person will work with several lenders. The borrower’s agent is knowledgeable about each lender’s interest rates and policies so that borrower’s needs are matched to the right lender.BCMortgage.ca is an originator. We work with several lenders. By not being exclusive to one lender, we are able to match the client to the best product and interest rate in the industry.
Lender’s agent
Lenders rarely find their own borrowers so they often will have a mortgage broker acting as their agent. The lender’s agent will usually be responsible for the mortgage documentation, administration and coordinating with the lawyer and mortgage originator.While you may be able to apply directly with a lender’s agent, you may not get the best mortgage since they work with a limited number of lenders.
Private Lender
Private lenders could be anybody. Usually, they are people with extra money to invest. To them, investing in mortgages allows them to achieve a higher return on investment (ROI) compared with bank savings accounts or GICs. It is very important that you work with a mortgage broker you can trust since you probably will not know the lender. You'll need to rely on the mortgage broker that will place you with a reliable and reputable lender. Otherwise, you could face problems when you need to renew your mortgage if the lender decides that they want their money back.The lender could also be a Mortgage Investment Corporation (MIC). This is a corporation established solely to invest in mortgages. By setting up a corporation, individual investors can pool their funds and invest in several mortgages, thereby diversifying the risk.
Interest rates
What affects the rate
There are thousands of private lenders in Canada and quotes can vary from lender to lender.Each investor will view the risk of each investment differently based on their knowledge of the property, applicant and the market environment. Some lenders specialize in certain fields (e.g., agricultural land or commercial property) or in certain geographical areas (e.g., Okanagan or the Lower Mainland). With their specialized knowledge, these lenders are able to charge a more attractive interest rate.
Market demands can also affect the quote. One investor could have excess cash to invest so they may be willing to lend at a more attractive interest rate just to get the business. Understandably, an investor with less cash to lend will target investments that yield a higher return.
Interest rate range
In general, it is safe to say that private first mortgages will start at Prime + 5% (although with strong applications, we’ve been able to source private first mortgages at lower rates). Private second mortgages will start at Prime + 7%.Thus, to obtain the best interest rate, it is important that you work with a good mortgage originator who works with a variety of excellent lenders. Invis, one of Canada’s largest mortgage originators, is one such company.
Brokerage fees
While lenders make their money on the interest rate, mortgage brokers earn on fees. Fees will range generally range from 2% to 5% of the mortgage amount. The originator and the lenders agent will often split the fee equally. Some lenders will also charge a fee.The fees may seem high to borrowers. Private mortgages are more difficult and time consuming to complete compared with traditional mortgages. A mortgage broker doing private lending will not have the same volume of business as a mortgage broker doing traditional lending.
An honest mortgage broker will advise you as to how much
you should expect to pay in fees prior to closing the
transaction.
Note: With us (and with most other brokers) there is no
fee to come in for a consultation. Once your mortgage
is approved, the commitment letter should clearly indicate
how much fees you will be required to pay to the
lender/broker. If you find the fees to high, you still
have the option to walk away from the deal at this point.
Renewal fees
You need to ask about the renewal fees. If they are high, you may be stuck with a huge renewal fee at the end of the term. Most private mortgages are usually short term (usually 1 year).The Lender is important
The choice of private lender is also important. We only deal with reputable and established lenders. You don't want to borrow from a small private lender that will one day need their money back at the end of the term (most private mortgages are for a 1 year term). This will leave you scrambling to refinance your mortgage with another lender and pay more fees.
Credit considerations
Property
The main consideration for a private lender is the security (i.e., the property). The lender will want to know:1) Where is the property?
2) How much does it appraise for?
3) What is the condition of the property?
4) How much equity do you have in the property?
Each lender will have their guidelines as to the level of financing they can provide. Some will go to up to 65%, others up to 75% for urban properties. As the financing level increases, you can expect that the interest rate will increase.
Rural properties are harder to finance. Lenders may limit their exposure to 65% (or less) of the value of the property.
Credit
Private lenders will always want to see your credit report. However, they will see beyond the numbers. If you've had an extraordinary situation (such as a medical event), this could go a long way to getting you approved on the mortgage.If you do have good credit, it will help in reducing the interest rate on the mortgage.
Income
We work with a variety of lenders. Some will ask for proof of income such as a job letter or tax return. Providing income confirmation could help lower the interest rate. Some lenders will not require any proof of income. Their focus will be on your credit and equity in the property.How to obtain a private mortgage
The best strategy is to approach a mortgage originator such as BCMortgage.ca. We work with a variety of lenders – from traditional lenders, non-conforming lenders and reputable private lenders. We can help you decide which option is right for you.We are a small brokerage firm. Our philosophy is to provide the best, honest advice to our clients. We pride ourselves in our passion for customer service and satisfaction. Having a low overhead, our fees are very reasonable.
Lastly, we will always place your mortgage with a lender that is reputable and established. There are many individual private lenders who dabble in this market. The problem with dealing with them is that they could want their money back at the end of the term (or charge you exorbitant fees to renew the mortgage). This will result in you having to scramble to refinance your mortgage, or even worse, being forced into foreclosure.
How Do You Choose a Mortgage Originator?
Obtaining private financing is very different from obtaining a traditional mortgage. There are hundreds of private lenders and there's really no way to know who offers the best rates and fees at any one point in time so choosing a good and honest mortgage originator is key.
Here is what you should expect from your mortgage broker: (1) Has access to prime, sub-prime and private lenders - It may be that your deal may qualify through an aggressive traditional lender. If this is the case, we will work to put you in a prime mortgage whenever possible; (2) No last minute surprises - Your deal will fund if you can meet the terms of the conditions of the commitment letter; (3) Renewals - if it turns out that you need to renew your mortgage, our lenders charge reasonable rates; (4) Working with reputable lenders - You will want to deal only with reputable and established lenders. If you deal with lenders with limited resources, they may need to get their money back so they can invest elsewhere.
About Invis
With over 800 brokers across Canada, Invis originates over $7 Billion in mortgages every year. As a major player in the market, Invis has the market clout, reputation and expertise to provide quality service to the industry. Visit Invis at www.invis.ca"My job is done when you know your options"
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