Applying for a private mortgage requires some research and due diligence. If you're considering one of these loans, you should start by understanding the differences between alternative lenders and traditional ones. This involves understanding the variances in what’s expected between your credit situation, financial health, and income.
If you're looking for a private mortgage and ready to apply, Mortgage Broker Store has the experience to handle this type of loan. They base their approvals on equity, not your credit score.
Stable Income and Financial Health
Using these two factors in deciding if you're ready for a private loan means comparing what alternative lenders and traditional banks require for income and finances. Generally, a private mortgage comes with a quicker and more streamlined process. Here are a few of the other differences between that and a more conventional loan.
What The Banks Look For In Your Income
Banks and credit unions are strict about verifying income. They have a list that includes T4 or T4a tax forms, which are annual statements. A bank must also see recent pay stubs and tax documents like a Notice of Assessment.
They also want to dive deep and see lease agreements, rental income, and investment income statements.
What Private Lenders Ask For
Private mortgage requirements from an alternative lender are much more streamlined and scaled down. These alternative lenders accept income from part-time and seasonal employment, as well as contract and gig work.
Whereas a traditional bank will look at self-employed income if the company's owner has profit and loss statements for two years, a private lender accepts that income without the statements.
There's a big difference between the two types of mortgages when deciding how your financial health affects your decision, too. A traditional loan emphasizes your credit score, while private lenders focus on the equity you've built up on your property.
So, Equifax generally sees a poor credit score from 300 to 579. A private lender will use what's called the Loan-to-Value (LTV) ratio as a key metric.
Here’s a scenario showing how that metric works. A property has an appraised market value of $400,000. Someone applying for a loan of $300,000 will have an LTV of 75%.
The formula looks like this:
LTV = Loan Amount / Appraised Value of the Property.
Private lenders usually go up to 75% LTV.
Understanding Your Credit Situation
Your credit score is a good indication of your financial situation. It's dynamic and reflects your ability to manage credit and money. Although the credit score numbers can vary, Equifax reports that a poor score of less than 600 will affect your ability to get a bank loan.
Your credit score is a major factor that traditional lenders consider when deciding whether to accept you for a mortgage loan.
Bad credit and a bad credit score don’t carry the same weight as a private lender. A poor credit score below 600 is a good indicator that you should be looking for a private loan.
The reason is simple. Alternative lenders focus on the equity that you've built up in a property. Equity is defined as the amount of the property that's being paid off and is mortgage-free. They use the above-mentioned LTV, which has a formula to replace other metrics like a credit score.
In all cases, traditional and private lenders have the same requirements. Both want to know why an applicant wants the money in the first place.
Clear Purpose for the Mortgage
Banks like to see applicants apply for financing to buy a home for personal living. Their applications require good credit scores and strong, verifiable income sources.
Private lenders are more lenient and accept applications from people who don't meet traditional lending criteria. The financial standing of the person applying isn't as crucial as the equity, and the explicit purposes for the mortgage can include the following.
- Alternative lenders approve mortgages for debt consolidation. If you have missed payments and a low credit score, this is a good indicator that you should apply for a private mortgage.
- It also makes sense for homeowners who are facing a power of sale or foreclosure to apply for one of these loans. The process for a power of sale has a Redemption Period, during which a delinquent homeowner can pay off the loan in full or bring it up to speed. Private lenders have faster approval rates, and homeowners can get the money to stop this process.
Homeowners can also take advantage of the streamlined application process if they need the money for an emergency. Some examples include a leaking roof or pipes that burst in the middle of winter.
Ability to Manage Higher Interest Rates
Keep in mind that private mortgages come with higher interest rates. In fact, as of September 2024, many private lenders charge between 8% and 12% interest rates. Usually, the lower the LTV, the lower the number the lender can offer an applicant.
Borrowers should also know that the combined legal, broker, and lender fees can range from 4% to 8% of the loan amount. Private lenders have higher interest rates because the risk is more significant for applicants with low credit scores and other factors, so they don't meet traditional criteria.
You’ll also know you're ready to apply for one of these loans when you understand the importance of equity.
Equity in Your Home
Equity is defined as the amount of your property or home that's paid off and mortgage-free. All lenders consider equity collateral, which reduces their risk. This equity is a big part of determining the LTV for a private loan.
The LTV is the percentage of your home's value that a private lender is willing to translate into a loan. You're ready to apply for one of these loans when you have high equity because it means you'll have a low LTV. That means a private lender will see you as less of a risk.
Finally, you know you're ready to apply for a private mortgage when you have the correct information to make an informed decision about the lender.
Knowledge of Private Lender Options
In some ways, private lenders are like their more-traditional counterparts. Any candidate you're considering should be clear about repayment schedules, loan terms, and interest rates. Make sure that alternative lenders can accommodate things like bad credit scores and contract or irregular income.
Jonathan and Ron Alphonso are both private lenders and real estate professionals who offer a variety of different private mortgage and loan solutions.
Their contact information is 416-499-2122 by phone or by email at [email protected]. You can find out more about what they offer and whether you're ready to apply at their websites, mortgagebrokerstore.com and powerofsalesontario.ca.