Advantages and Disadvantages of a Private Mortgage for Lenders

If the private loan is documented and structured by the law (and correctly accomplished), private mortgage lenders Toronto Ontario can see several benefits from a private mortgage. These include a higher rate of return on the investment when compared to other alternatives and a regular stream of income from the mortgage payments. Since the loan is backed by the property being purchased, it is more secure than other investment options. Some lenders use the investment as a way to move money around quickly when making short-term private mortgage agreements. Some home sellers who have difficulty in unloading a property will also make a private loan an option to help the home buyer take over existing mortgage payments and use the private loan to pay the difference between this and the sales price of the property.

The primary risk of a lender with a private mortgage is the always present potential of the borrower to default on their payments or damage the property. A significant consideration on the part of private lenders is the inherent risk entailed with offering a mortgage to a person or family who can’t qualify for a publicly backed note. This includes the possibility that the person may be unable or unwilling to make payments on the loan once obtained. There also may not be as many options to obtain the money lent if the person dies or decides to abandon the home if they don’t provide specific terms on what will happen to the debt in the event either of these events occurs. Some states will also mandate a cap on the total amount of interest that can be charged on a private loan.

How to Avoid Problems with a Private Mortgage

The easiest way to avoid issues with a private mortgage is to make sure one researches the local and state laws that govern this type of loan before entering into a private loan for a home or property. This requirement doesn’t just apply to those seeking loans; however, lenders need to make sure they understand the rules associated with entering into a private home loan. Both parties will need to make sure they agree on how the loan is going to be secured. This primarily consists of any collateral that will be provided to secure the loan or the details on what will happen if the person who is taking out the loan must enter foreclosure or is late on payments. Copies of all documentation related to the loan should be maintained by both parties as well.

Considering Private Mortgages as an Investment

Some third-party private investment companies will offer private mortgages or seller-financed mortgages as an opportunity to invest. These types of investments are then bought and sold through a financial exchange. In some of these cases, the investor can then sell their “stake” at a later date for a discounted price and provide the seller with a single lump-sum payment vice the normal monthly payments. In order variants of this type of investment, a “balloon clause” can be included that requires the person who obtains the loan to either pay it off by a certain point or convert it to a conventional mortgage. Depending on the setup of the investment, it can take several years to turn a profit based on overhead or may not provide as much income as putting one’s money into the stock or bond market.

What Role Does PMI Have with Private Mortgages?

Unless you are seeking out a private mortgage through a family member (and sometimes even in these cases), the lender is going to want to make sure that there is enough equity in the home that they will not take a significant loss in the event of foreclosure. This comes from most homes being sold in foreclosure realizing a reduced price compared to what is outstanding on the home loan (in most cases). As a result, the lender will want to make sure that they have a buffer in place to mitigate their potential losses on the property. This is where the 20% figure comes into play about the requirement to carry private mortgage insurance.

Most private lending entities will still allow consumers to pursue loans when they can’t afford to pay a 20% down payment if PMI is an option to obtain. This allows the mortgagor to take out the loan with sufficient PMI coverage to cover the difference in the loan-to-value (LTV) ratio. In reality, PMI is issued by a company specializing in this type of coverage to lending organizations to the benefit of the lender in the event of property foreclosure. PMI will then pay the bank or company that owns the mortgage the difference in the price realized at the foreclosure sale versus the amount of money financed for the loan.

Mortgages that are “public” or backed by governmental agencies such as FHA or VA loans are not eligible for PMI. Instead, these loans leverage equivalent insurance to PMI that is managed in a slightly different manner. For example, VA and FHA loans will continue to require the insurance equivalent or fee to be paid well past the point of the LTV dropping below the 80% threshold. Read more on our post about what is a private mortgage to get further insight into private lending in Ontario

Toronto Private Mortgage Lenders – Expert Mortgage
85 E Liberty St, Toronto, ON M6K 3R4
(289) 203-7282

What is a Private Mortgage?

Private mortgages have been in existence for a while; however, since United States banks and traditional mortgage lenders have tightened up their lending criteria following the 2008 mortgage crisis, they have become an increasingly popular option for consumers. A private mortgage is popular with two types of people: 1 – Those who are having trouble qualifying for a traditional mortgage, and 2 – Those who desire a quicker turnaround time or potentially better financing on the property in question. These mortgages aren’t just for home buyers though, as investing in companies who specialize in private mortgages has also become more popular.

How Do Private Mortgages Work?

In today’s home buying environment, private mortgage options are commonly being touted as an alternative to going through a traditional bank or mortgage company by mortgage brokers. Besides providing homeownership opportunities to those who can’t qualify for traditional loans in the more strict regulatory environment, they also help consumers avoid many of the predatory lending tricks found in the marketplace. One of the easiest methods to locate potential private mortgage lenders in the United States is to leverage a mortgage broker who includes private mortgage companies in their available listings of lenders. Once this type of mortgage is obtained and closed, it works very similarly to a traditional note. Lenders will need to read all of the “Small Print” when obtaining a private loan, since some lenders may have slightly different requirements than traditional mortgage companies with regards to pre-payment penalties and interest payments.

Private Mortgage Dangers

Although private mortgages provide the opportunity to individuals to own a home who may be currently shut out of the mortgage market, they are not without danger. Similar to other industries, the private mortgage industry does have its shady cast of characters who prey on those who are extremely desperate to get into a note. Since private notes have increased in popularity, some of the “less-than-desirable” companies have started advertising their loans on late-night infomercials, junk mail, and email spam. Although these opportunities “could” be legitimate, consumers must read the fine print on the actual interest rate to be paid, repayment terms, early payment penalties, and hidden balloon payments when dealing with a private mortgage company on their own. Although a mortgage broker can provide a layer of security, it is still important to have all details of the loan explained to you and demonstrated in the mortgage contract before agreeing to terms.

Do Private Mortgage Companies Require PMI?

Yes, most private mortgages will require PMI on new loans when the consumer cannot meet loan-to-value ratio requirements. The exact percentage of a down payment will vary on a private mortgage depending on the lending company; however, it will normally be between 10 and 20 percent of the total amount of the mortgage. It’s also important for individuals to understand the terms for eliminating payment of PMI once there is sufficient equity in the home or property being financed before closing on a private mortgage.

Advantages and Disadvantages of a Private Mortgage for Borrowers

The primary advantage of a private mortgage for consumers is that the note can be obtained from just about anyone with sufficient capital to underwrite the note. As a result, the terms of a private mortgage can be significantly more flexible than those underwritten by the Federal Government or VA. Private notes have become more popular amongst family members in addition to companies providing the loans since they allow the money to be kept within the family. Many private lenders also do not require collateral when providing the loans which provides consumers with bad credit a means to improve their scores while buying their own home.

One significant negative of making a private loan within a family is the risk of the relative not being able to pay back the loan. Besides being a negative impact on each person’s finances, it can also result in a soured relationship between the lender and the family member who borrows the money. Depending on the nature of the private loan, the person obtaining the mortgage may not be able to deduct the interest from their federal income taxes. Read our next post on private mortgage dangers in Ontario.

Private Mortgage Dangers

In the mid-to-late 2000s in the United States and much of the free world, the requirements to obtain a home loan or mortgage had been significantly relaxed. Since the mortgage crash of 2008; however, the rules to obtain a publicly backed mortgage have significantly increased to the point that many consumers find it difficult to obtain a home or property loan. As a result, the private mortgage industry has seen a “mini-boom” in providing home loans to both consumers with strong credit as well as though who may have “less-than-desirable” credit ratings or foreclosures on their record. Although private mortgages service this critical need in the industry, there are several private mortgage dangers worth looking out for before signing the bottom line on a private note for your own home.

How Does a Private Mortgage Work?

As mentioned, a private mortgage is an alternative to obtaining a traditional home loan. Instead of going to your local bank to finance the mortgage, they are provided by either companies or individuals who lend money to consumers for home purchases as an investment. Many times, a private mortgage firm will do business with several mortgage brokers who recommend their services to clientele seeking out both traditional and alternative mortgage options. Once obtained, the private loan is very similar to a traditional note but may have different terms. These include but are not limited to: being required to pay for private mortgage insurance if you don’t have 10 or 20% of the loan value available in capital funds when closing the loan, potentially having to pay a balloon payment during the life of the loan, and other legal differences from publicly backed notes.

Private Mortgage Dangers

1 – Requiring a “Good Faith” Payment Before Closing

A common scam encountered in the private mortgage market is requiring the consumer to make a “good faith” payment before closing on the note. The typical “promise” by many of the scam companies is that they require this payment to do an “underwriting test” on the individual’s credit to see if he or she is worthy of the loan. This is likely a trick or scam to get a large payment from you that may never actually be used towards the property and is just asking for trouble.

2 – Thinking You Can’t Qualify for a Publicly Backed Mortgage

Several private mortgage lenders will try to play on consumers’ fear that they can’t qualify for a publicly backed mortgage and try to convince them not to do so. Many times, this fear on the part of the consumer can be unfounded. In reality, many individuals would qualify for a publicly backed note now that the market is showing signs of recovery; albeit, it may be at a higher rate than those being advertised. It’s worth checking; however, as the costs associated with a publicly backed loan with a slightly higher rate may be equivalent to those you get back from private mortgage loan quotes.

3 – Not Knowing what to Expect with a Private Mortgage

A private mortgage isn’t free money. At best, you are going to obtain a home loan that is equivalent to what you were used to qualifying for several years ago. At worst, you are going to run into individuals or a company who just want to make more money off of you than a bank would on the loan! Make sure you know what you are getting into with the loan. The worse your credit score, the higher the interest or fees you should expect to pay. Not that this is a bad thing, but just something to keep in mind when shopping for private loans for your own home.

4 – Not Hiring a Lawyer to Review the Loan

Another common danger with private mortgages is relying on the lending company or individual’s lawyer to prepare and review the loan documents. In most locations in the United States, it should only cost you a few hundred dollars to retain a local real estate attorney to take a look at your private loan paperwork BEFORE YOU SIGN IT! This is a small price to pay compared to the potential of being out thousands of dollars if the loan is a scam or the potential long-term damage that scammers can do to your credit if you sign up for a less-than-legitimate loan. Always be aware of the advantages and disadvantages when venturing into Private Mortgages.