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Jun 7, 2024reading time icon8 min

Real estate: private lenders for your mortgage

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Real estate: private lenders for your mortgage
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When it comes to getting a mortgage to buy a home, most people think of the big banks. But they're not the only ones out there. There is an alternative: private lenders.

Despite the concern and skepticism they can sometimes arouse because of the high-interest rates some charge on the loan, alternative lenders can prove very useful in certain circumstances. To demystify what's real and what's not, here's an overview of the most important information you need to know on the subject.

Private lender vs. financial institution: what's the difference?

Financial institutions are attractive for most real estate financing projects. However, in the case of short-term investors, banks may be less advantageous. In some cases, they may even refuse to provide the requested loan.

In such a case, the investor can turn to private mortgage lenders. Their operation and eligibility criteria differ from those of traditional lenders. A person whose application for financing has been rejected by a bank may then find that his file is accepted by a private lender.

Suitcase full of money

What is a private mortgage?

A private mortgage is an alternative source of financing to financial institutions. It can be an excellent option if the conditions offered by the lender are acceptable in terms of interest rate, application fees and qualification requirements.

But be careful before committing to the first private lender you meet: some of them are very expensive! Sometimes it's better to pass on an opportunity than to use their services.

What is a private mortgage lender in Quebec?

Who are these private lenders who can help you realize your real estate project? Obviously, there is no one type of private lender. They can come from many different backgrounds.

Some may be groups of investors who have formed mortgage investment companies or syndicates that provide capital from pooled funds.

A private lender may also simply be a wealthy individual who has made a fortune through business profits, the sale of a company, real estate equity, inheritance, personal savings...

Many of them are or have been real estate investors. They use the capital they've built up over the years, lines of credit or real estate they own to make loans.

How do alternative lenders operate?

In general, private lenders operate much like large financial institutions. Most of them:

  • Conduct a credit check;
  • Analyze the profitability of the property;
  • Investigate the reliability of the borrower;
  • Evaluate the risk they represent and the guarantees they can offer.

Old man with a small house in his hand

The first step in applying for a private mortgage is, of course, to analyze your project. The criteria used to determine your eligibility varies from lender to lender. Many will charge a fee for reviewing your file, either a percentage of the loan or a lump sum.

If your application for financing is accepted, you will receive an offer from the lender, which will include information about the terms and conditions of the loan:

  • Interest rate;
  • Repayment period;
  • Guarantees required;
  • Etc.

It's important to remember that private lenders usually take more risk than banks. In return, they may charge higher interest rates or have stricter repayment terms.

Private lenders can provide first or second mortgages, depending on the case.

When should you get a private loan for your real estate project?

Although private lenders are generally not the first source of financing that individuals turn to for their real estate projects, that doesn't mean they're a bad alternative. In some situations, using their services can be a good option.

This may be the case if:

  • The bank rejects your loan application;
  • Your down payment is insufficient to finance your project;
  • Your income from employment is insufficient to qualify you with a financial institution;
  • You've been self-employed for less than two years (this represents an increased risk, which discourages banks);
  • You have been discharged from bankruptcy or have poor credit;
  • You have a real estate flip project;
  • You need money quickly or for a short period.

Townhouses

In any case, it's important to make sure that the loan you're requesting is within your means. Make sure you can repay the amount you borrow before you proceed with your project.

After all, the purpose of using private mortgage lenders is to realize your ambitions, not to get yourself into excessive debt. So be careful!

Pros and cons of this type of financing

Here's a list of the main advantages and disadvantages of using a private lender for your real estate project.

Advantages:

  • The loan is usually more flexible;
  • The loan is approved more quickly;
  • There are often no prepayment penalties;
  • There are fewer restrictions attached to the loan;
  • This type of lender has a higher risk tolerance.

Disadvantages:

  • Interest rates are higher than bank rates;
  • In some cases, the contract may contain clauses that are dangerous for the borrower;
  • Some people posing as private lenders may be unscrupulous.

How do I find a private lender?

When it comes to obtaining financing for your real estate project, the best solution is to use a mortgage broker. He or she will be able to assess your situation and advise you on the options available to you.

In addition to financial institutions, many mortgage brokers have also developed a vast network of trusted private lenders. This expert can shop around for you to find the lender that best suits your needs.

If you don't want to go through a broker, a few quick searches on the Internet will allow you to find several alternative lenders ready to provide you with funds for your real estate project. Before making your choice, however, be sure to check the lender's reputation and take the time to compare to find the best deal.

To get a quote, simply visit the website of the lender you're interested in and submit an online application. The majority of private lenders offer this type of online quote.

Private lender looking at a file

Fast money loans: beware of scams!

Before doing business with a private lender, make sure you're not dealing with someone falsely claiming to be one. Some companies that promise fast financing charge a fee upfront to analyze your file, with no intention of financing you. That's how they get money without ever making a loan!

Unfortunately, these types of scammers do exist, which is why you need to be vigilant and do your research. For example, you can ask your potential lender for references, search for them on the Internet, check if they have received any complaints from the Office de la protection du consommateur or the Autorité des marchés financiers, etc.

Ask a notary for help

Confused about a private mortgage contract? If you're not sure, don't hesitate to have the offer checked by a notary specialized in real estate before signing anything.

A notary will be able to examine the proposed clauses and, if necessary, explain them to you so that you fully understand their content. You will then be able to accept or reject the offer with full knowledge of the facts.

Are you looking for a mortgage?

XpertSource.com can help you in your efforts to find a mortgage broker. By telling us about your project, we will refer you to top-rated experts, free of charge! Simply fill out the form (it only takes 2 minutes) and you will be put in contact with the right experts.

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