Private Mortgage

Private Mortgage

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private mortgageWhat is a private mortgage you ask? A private mortgage is a loan provided by individuals who wish to gain a higher return on their investment focused funds in comparison to depositing their money into a regular savings bank account, or an investment type of an account with low yields. A private mortgage is secured against the property that the borrower has requested the private mortgage for.

Private mortgages can be an accumulation of a large number of investors who have pooled their personal or business / investment related funds into a trust account, or single individuals with enough of their own money. These funds are managed by a mortgage brokerage company or a company solely created for the reason of lending out private funds for the purpose of real estate financing.

To get approved for a private mortgage is not as difficult as to get approved for a mortgage from a lender such as the chartered banks; there are less restrictions in comparison to the other extreme, which are the chartered banks that require detailed information from the borrower, such as employment / source of income, proof of down payment, and a healthy and strong credit score with no recent credit issues. In comparison, the most important item that a private lender looks at is the property that is being purchased; where is it located, what is its condition, and can it be sold if the borrower defaults on their mortgage payments and the private lender has to foreclose and sell the property.

A private mortgage comes with a much higher interest rate and there is a onetime lender fee that must be paid by the borrower of the private mortgage. Normally what happens is that the borrower cannot be approved for a regular mortgage from a bank or the other specialty mortgage lenders, and what is left is a private mortgage. These types of mortgages are contracted to be paid in full in a short period of time, such as one year or less, and they are used many times as a second mortgage to cover up the difference of the down payment that the borrower does not have.

For example, the borrower does not get approved by one of the big banks in Canada, and his or her mortgage broker or agent will take their client to the next available option, which are what we call the ‘B’ lenders who deal with special case scenarios, such as those who have had previous bankruptcy’s, self-employed individuals who can’t prove their income, those with bad credit, …etc. You get the picture. The ‘B’ lenders will potentially give the client a mortgage loan no more than 80 – 85% of the real estate value; otherwise known as LTV Loan To Value. That means if the borrower does not have enough of the remainder of the funds in the form of a down payment, then they are left with trying to get a private lender to give them a private 2nd mortgage which would cover part of the down payment and the borrower would provide the rest of it. No lender would ever go up to 100% financing on these special case scenario types of deals. Therefore, the 1st mortgage lender will go up to a maximum of 80 – 85%, then they will stipulate in their contract that the borrower can get a 2nd mortgage up to an additional 5 – 10% and the rest the borrower will have to provide from his or her own resources.

Pros

– Quick money

– Straight forward approval process

– Look at the property more than the applicant

Cons

– High interest rates

– Lender fees

– Short term borrowing solution; paid back usually by one year or less

– Because it’s short term, at the end you have to refinance mortgage to pay back the 2nd mortgage and costs occur again in a short period of time

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Canadian Mortgage Rules

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New Canadian Mortgage Rules

It has been several years now since the Government of Canada decided to take steps in tightening certain Canadian mortgage rules and guidelines for Chartered Banks and other lending institutions such as Trust companies and Credit Unions so that the new Canadian mortgage rules would help cool the consumers hunger and appetite for debt accumulation, especially buying real estate.

Since back in February of 2010 until now, the Canadian Government has implemented multiple rules and tightening of existing regulations and we wanted to summarize them here for your quick reference. new canadian mortgage rules

– All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

– Canadians can withdraw equity from their homes in refinancing their mortgages up to 90 per cent of the appraised home value from 95 per cent. This will help ensure home ownership is a more effective way to save.

– When purchasing real estate other than one to live in, Canadians are required to have at least a minimum down payment of 20 per cent. This measure is to reduce the risk involved in investment properties based on market speculation that property values can go up for R.O.I. Return On Investment purposes.

– The maximum amortization for insured mortgages has come down from 30 to 25 years, and many lenders have adopted this policy even for non-insured mortgages.

– Borrowers applying for an insured variable rate mortgage must be approved using the Bank of Canada 5 year bench mark interest rate. This means that the borrower can no longer be approved with the discounted variable rate that they are applying for, but must be risk tested by seeing if they can be approved if the variable interest rate was to go up to the 5 year bench mark rate, which is always higher than the discounted variable rates that the banks promote. If the debt calculation ratios work out and are within aloud parameters, than the borrower will be approved the variable mortgage and will receive the advertised discounted rate.

– Further to the above new rule, the five-year variable rate conventional mortgages or conventional mortgages with terms less than five years now require that the borrower qualify based on the greater of the Bank of Canada five-year benchmark rate or the lenders mortgage contract rate applicable to the term chosen. For terms of five years or more, the qualifying rate is the contract rate.

– As well, the underwriting process and debt calculations in approving a borrower for a mortgage has become more strenuous to insure that the borrower has the strength and credibility to be able to pay back the loan amount.

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