Private Mortgages
Private mortgages are a financing option that is often considered a last resort for borrowers who are unable to secure financing through traditional lenders. These mortgages are provided by private individuals or companies and typically have higher interest rates and fees compared to traditional mortgages.
Key Points:
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Last Resort Option: Private mortgages are usually sought when borrowers have exhausted all other options for financing a home purchase or refinancing. They are considered a short-term solution and should be used with caution.
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Short-Term Solution: Private mortgages are intended to be short-term solutions, with the goal of transitioning to a traditional (A or B) lender within 1-2 years. This is because private lenders often charge high interest rates, sometimes as high as 15%.
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Exit Strategy: It is important to have an exit strategy when taking out a private mortgage, which involves planning to transition to a traditional lender as soon as feasible. This may involve improving credit scores, reducing debt, or other financial improvements.
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Higher Fees: Private lenders charge higher fees compared to traditional lenders, often ranging from 2-3% of the mortgage amount. Additionally, since private lenders do not pay brokers any commission, mortgage brokers will typically charge a fee to facilitate the transaction.
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Minimum Down Payment: Private lenders typically require a minimum down payment of 20%. However, they may ask for more depending on the borrower's financial situation and the property being financed.
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Qualification Criteria: To qualify for a private mortgage, borrowers must demonstrate that their personal taxes are up to date and provide a reasonable case that they can make the mortgage payments. Private lenders may be more flexible in their qualification criteria compared to traditional lenders.
When to Consider a Private Mortgage:
While private mortgages should generally be avoided if possible due to their high costs, there are situations where they may be appropriate. For example, if a borrower has a short-term financial issue that is preventing them from qualifying for a traditional mortgage but expects to resolve it quickly, a private mortgage may be a temporary solution.