Canadian banks and prime lenders are subject to strict government regulations surrounding approval criteria such as harsh stress tests, credit evaluation and income verification among many other factors that require close evaluation. This leaves many people who are seeking a loan unqualified for a mortgage within the prime lending arena. Luckily, private lending companies are not subject to these same rules and regulations and can qualify you strictly based on home location and home equity, which opens the door for many Canadians to attain a loan. However, there are certain precautions you must take if you are considering one.
Before you consider getting into a private mortgage loan, always have an exit strategy! Remember, this is a short term solution. Very often, having a calculated exit strategy is taken too lightly and homeowners end up finding themselves stuck with 8% + interest rate for years on end leading to financial struggle. A real exit strategy is calculated based on earnings, foreseeable debts and a plan to make serious changes to the factors that are limiting your current situation. Will you be able to pay off your Private Loan in 1 year or 2 years? Interest only payments are attractive in the short term but there are no payments allocating into your principal balance which will be due in full upon maturity.
Not all private mortgages are designed for people who have been rejected by the bank, have bad credit or low income, sometimes it just makes sense to take a private loan, especially when investing into a property flip or substituting for high interest debt repayment. Investors will almost always use a Private Loan since it’s much faster and easier to attain than a mortgage from an A or B lender and most of the time, payments are structured into interest only monthly payments. For example, if you take out a loan for $50,000 at 10% interest, you pay $50,000*0.1/12months= $416.66/month. Not too bad right? Considering credit card debt at the same amount, at 21% interest will cost you far more.
Here are some reasons you may consider using a private mortgage:
1. You need to re-establish tarnished credit by paying off credit card balances because banks and prime lenders will not approve you:
- Private loan will consolidate your debts and significantly improving your credit
- There is a clear exit strategy, your credit will improve significantly and prime lenders/banks will take over the private loan at a much more attractive and manageable interest rate upon renewal.
2. Your income cannot be confirmed by income tax statements or a job letter and you are being turned down:- Private loan will be a great short term solution if you plan on employment change in the near future or plan to increase your self-employed declared income in the following tax year.
3. You need to pay for home repairs or renovations:
- Typically lower risk since the loan size is smaller
4. You got laid off and need money for living expenses:
- Private loan is a great way to tap into your home equity fast
- Loan will be paid off once you find employment?
5. To stop a power of sale or foreclosure:
- Often, a private loan is the only means to save your home and give you a chance to re-establish your situation.
6. You want to purchase a property that is unconventional and prime lenders and banks will not fund:
- Private loan may be your only option, but beware… unless you have a good exit strategy, you may find yourself to be stuck with the higher rate for good!... or at least until you sell.
7. You require a short term loan with quick turnaround time and don’t want to or can’t wait for a long approval process:
- Investors will often seek out Private loans in order not to waste time with their flip or to purchase a hot property right away.
So, do you think you need a private loan?
You should start by talking to your Lawyer, Financial Advisor and a Mortgage Professional to advise and guide you through the process. This is not a DIY undertaking and should be carefully evaluated by professionals who are working for your best interests. Want your obligation free assessment? Click contact us ... Just leave your name and phone number and type "I'd Like my free assessment!" in the subject.