Private mortgage loans are often presented as an option to home buyers who cannot qualify for a mortgage with other more traditional types of lenders. Some people consider private mortgage loans to be a “last resort” but the fact is, they are an important mortgage tool and in the right circumstances, you may want to consider getting a private mortgage loan.
Here are some of the pros and cons of getting a private mortgage loan.
Pro: Easier to qualify for.
This is one of the biggest pros of a private mortgage loan. To get a mortgage with a federally regulated lender in Canada (such as a bank) you will need to pass the mortgage stress test. This can dramatically reduce the amount of loan that you qualify for or in some cases it might mean that you don’t qualify at all. With a private mortgage, though, you don’t have to worry about the mortgage stress test, and you don’t have to have a perfect credit score either. This makes private mortgage loans a good option for people that don’t qualify with other lenders.
Con: The interest rate is higher.
This is perhaps the biggest negative of a private mortgage loan. Since the reason you are looking at a private mortgage is likely because you don’t qualify with other lenders, your lender will likely consider you a bigger risk. To offset this risk, they are going to charge a higher level of interest.
Pro: Good for Flippers
If you are buying a home to fix up and re-sell, you may not want to get a traditional mortgage with a long amortization period. Private mortgages can be great for flippers who only want a mortgage for a short period of time.
Con: Less time to Pay Back
Since private mortgage loans are generally for very short periods of time (usually one year, or occasionally two), this could be considered a drawback if you need more time to pay off the loan. Private lenders are usually looking to make a quick profit and they are not set up to service long-term loans.
If you are considering a private mortgage, we would be happy to help. Contact us today to speak with one of our professional mortgage brokers.
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