If you’ve been denied a mortgage from a bank or mortgage lender, there’s no need to fret. You may have another option to secure the funds to purchase a home. Learn what private mortgages are, the pros and cons attached to them and how to arrange a private mortgage so you can meet your homeownership goals.
Everything You Need to Know About Private Mortgages
Buying a home is a major undertaking and when you understand the potential challenges, it can make the whole process a lot easier to navigate. You may have heard the term private mortgage before and are unsure what it means. If you’re considering purchasing a home then it’s worth taking the time to look at what private mortgages are, how they work, and how to be approved for one.
What is a Private Mortgage?
For anyone who has bad credit, has filed for bankruptcy or has been denied a mortgage through a bank, the idea of owning a home may seem out of reach. But this isn’t necessarily the case. Since new mortgage stress rules were introduced in 2018, many Canadians have had to look for another option when trying to secure a mortgage. After being denied a mortgage through your bank, other financial institutions and “B” lenders, a private mortgage may be your best path towards homeownership.
A private mortgage is a home loan that is financed through a private source of funds. This can include friends, family, investors, or a business. If done correctly, this type of mortgage can be beneficial to all parties involved. Before considering a private mortgage, it’s worth considering the pros and cons.
Advantages of a Private Mortgage
Private mortgages are a popular option for many people who don’t qualify for a traditional mortgage, but like most things in life, there are advantages and disadvantages associated with a private mortgage. Here are some of the benefits:
Qualifying is easier
When you attempt to receive a loan from a bank or mortgage lender, a lot of documentation is needed to showcase your financial situation, and sometimes the outlook doesn’t meet the lender’s requirements. Even if you can repay the loan, many lenders have stringent criteria that must be met, and some potential buyers may not be able to meet that criteria. For example, if you’re self-employed you may have more than enough income to afford a mortgage, and still be denied because your income is not considered “stable.” Luckily, a private mortgage is much easier to obtain and there isn’t a long list of qualifications to meet.
Financial benefits
Borrowers who obtain a private mortgage can often save money by paying a lower interest rate than they would with a bank or other mortgage lender, especially when that private mortgage is done with a family member or friend. Just ensure you are following all CRA rules associated with a private mortgage. The benefit for the lender is that the mortgage interest is often higher than what could be earned from most savings accounts and investment vehicles. This makes a private mortgage a win-win for both parties.
Mortgage flexibility
Depending on the lender, a borrower should be able to set up a loan package that may be more flexible with both parties than what would occur with a bank or other mortgage lenders. As long as both sides are content with the details of the agreement, then everyone will be happy.
Disadvantages of a Private Mortgage
May alter relationships
Money is one of the biggest things that can damage relationships between family and friends. This damage can be more severe when debt is involved. Stress, guilt, and anger can arise if the borrower is having problems making payments or if the lender feels like they have to chase the borrower around for their money. Both parties must know their roles and keep up their end of the agreement. For this reason, it’s often a wise choice to get a private mortgage from a third-party lender rather than friends or family.
Things can change
Circumstances may arise and affect not just the borrower but the lender as well. The borrower must consider who is lending them the money and understand how financially stable the lender is.
Additional costs can add up
Buying a home involves more than just securing a loan. There are maintenance and repair costs that will come up down the road. Lenders need to feel confident that the borrower will be able to cover the cost of home maintenance and the borrower must be sure they have the financial means to pay for all the associated costs of homeownership. That’s why it’s important to put together a budget for your new home and have a good idea of how much money you’ll have on hand to comfortably make your mortgage payments.
Taxes may be affected by both parties
Before moving large sums of money around, both the lender and borrower should speak with a tax consultant to find out how the taxes they will pay on their upcoming assessment will be affected. Neither party wants to get caught by surprise come next year’s tax return.
Ensure the loan is well-documented
With so much money involved; a simple handshake won’t suffice. Every element of the loan should be documented to help keep the agreement intact and ensure that all details are understood and followed by both parties. Your private mortgage agreement should have all this information spelled out simply and in a way that everyone understands:
When are payments due? Monthly, Quarterly, or on the first of the month?
- Is there a grace period?
- How and where should payments be made?
- Is the borrower allowed to prepay, and if so, will there be any penalties for doing so?
- Has the loan been secured using any collateral?
- What will happen if the borrower misses payments? Can the lender charge late fees, report to a credit reporting agency, or foreclose on the home?
The more concrete details that are documented, the less chance there is for confusion to take place. The parties on either side of the agreement should know their role and responsibilities and need to adhere to them.
Enlist the help of professionals
A private mortgage is a big decision that shouldn’t be taken lightly. Having a home is important and the help of professionals is a must. Work with qualified experts to ensure all documentation is in order. Talk to a tax expert before moving large sums of money around and talk to a local attorney who knows about private mortgages to ensure that you’re protected throughout each part of the transaction.