Obtaining a traditional mortgage in Canada can be a struggle, especially if you’ve experienced financial hardship in the past that has left an impact on your credit report. Private mortgage lenders in Toronto are an invaluable resource for those who find themselves in such a situation, if home ownership is high on their list of priorities. However, there is much to learn about private mortgage lenders before you commit to any kind of agreement with one.
Continue reading to learn the basics of dealing with private mortgage lenders. This information is essential before you decide whether or not this plan of action is right for your home ownership ambitions.
What are Private Mortgage Lenders?
In Canada, there are three types of lenders. The first are referred to as “A lenders” and typically are traditional banking institutions. These lenders work with “A-quality” clientele that can issue a down payment of at least 20% of the home’s value. The second are “B lenders,” institutions that will work with those who have less to give as a down payment or who have slightly tarnished credit. In exchange for their service, mortgage insurance and higher interest rates may apply.
Private mortgage lenders are the third type of lender in Canada. Private lenders, also known as “unregulated lenders,” are institutions or individuals that give home mortgage loans to those who are considered high-risk borrowers, such as those with poor credit. Private mortgage lenders view their clientele as an investment, particularly since the loan is never going to be more than the value of the home and the lender gets to hold the house itself as collateral.
How Do Private Mortgage Lenders Disperse Mortgages?
The requirements for obtaining a mortgage through a private lender are often much more lenient than those of A and B type lenders. In exchange for their willingness to work with riskier clientele, these lenders will often attach a higher interest rate to the loans that they facilitate.
To best navigate the risks and potential pitfalls of this type of mortgage, it is best to recruit the help of a lawyer or broker who is experienced at handling these matters. Each lender dispenses loans on their own terms, meaning that it is not good enough to be self-educated on the subject. Hiring a legal expert in this area can save you a lot of time, frustration and money.
When Should I Look for a Private Mortgage?
Private mortgages are not the best resource for individuals with higher credit scores who can secure a 20% down payment on their home. Those with the better financial circumstances are almost always better off securing loans with A and B lenders. There are, however, numerous circumstances in which private lenders might be the best choice. Such circumstances include, of course, when your credit is low and you can’t make the 20% down payment necessary for a conventional mortgage loan through an A or B lender.
You may also want to choose a private mortgage lender if you:
- Need quick funds to prevent foreclosure on your current property.
- Are self-employed and have unverifiable income.
- Are attempting to purchase a living space less than 600 square feet, as many banks won’t accommodate these types of loans often.
- Are looking for a second mortgage.
While private mortgages might not be ideal for many prospective home owners, they can be a valuable asset for those who struggle to find assistance through the bigger-name A and B lenders of Canada. However, it is always worth combing over the details of your mortgage agreement with a fine-tooth comb, as these mortgages are typically unregulated and can leave you facing a massive pitfall in the event of foreclosure.