Owning a home can be an important step toward gaining your financial freedom, but what happens when traditional lenders just won’t approve you for a mortgage? Until recently, only about 4-5% percent of mortgages in Canada have been from private lenders, but as stricter rules have come into effect, we are seeing that number starting to rise.
In most cases, private mortgages are interest only loans, but because the lender is usually taking on more risk, they usually charge much higher interest rates. To avoid paying these higher rates for an extended period of time, borrowers should plan on having a private mortgage for no more than three years while they repair their credit.
Circumstances where it makes sense to get a private mortgage include:
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When the borrower can’t get a mortgage through a traditional lender because they don’t have enough credit.
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When the borrower cannot verify their income because they are self-employed.
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When the borrower is a non-resident of Canada.
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When the borrower risks being foreclosed on or has property or income tax in arrears.
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When the borrower is seeking a mortgage for a mobile or tiny home (less than 600 square feet). Most banks will not finance these.
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When the borrower is applying for an investment property mortgage or second mortgage.
If you have little credit or if your credit is bruised, then private mortgages can be a good option because they usually have a more flexible approval process and don’t tend to require as much documentation. As long as you have enough equity in your property or a large enough down payment, you can usually qualify.
When a private mortgage may not be the right solution
As we noted earlier, private mortgages have higher interest rates and should be considered as short-term solutions. Before applying for a private mortgage, it is a good idea to have a plan in place that will let you build up your credit and eventually change your mortgage over to a more traditional lender.
If you do not think you will be able to do this within the next three years or so, then a private mortgage may not be the right choice for you.
The decision of whether or not to get a private mortgage can sometimes be confusing. It is always best to sit down with a professional mortgage broker to weigh you options.
To learn more about private mortgages and other borrowing options, call the professionals at Akal Mortgages at (416)-621-1300.
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