Mortgage lending, as many successful private money lenders would attest, can be a very lucrative investing tool for the average person to add to their portfolio. In BC, private money lending on real estate is pretty basic. In general, the average investment will go up to 75% LTV or Loan to Value. Higher LTVs do happen up to 80%, but, for these examples, we will use 75%.
This means if the client has a home valued at $500,000 you can get a 1st Mortgage of $325,000:
- $50,000 in debts or other bills
- Client can borrow up to $50,000 or 75% of the value of their home
- 75% x $500,000 = $375,000 – $325,000= $50,000
- Regardless of credit or income
The primary philosophy is that not everyone’s income or situation is the same. Hence, allowing people to access funds in a nontraditional manner (i.e., not using TDS and GDS ratio as well as verifiable income) enables clients to meet their goals and the private money lenders to be paid very well for their assistance.
General Information For Private Money Lenders That Helps Determine Risk & Rate
- Appraisal Reports or BC Assessments on lower LTV homes can be a good indicator of value.
- These are stated income products. So, in most cases, NOA’s or Job Letters are not required.
- If BFS an online listing or website to see if the business exists or if salaried average income indicator for the industry type.
- Credit Bureau is one of the best indicators of a client’s ability to pay. A high or low credit score is not always the best indicator, so try looking at the history over several years. Often, you can look at the credit report and see one particular month or year that has been the major starting point. Generally, there has been an incident that has caused a domino effect in credit delinquency. People generally want to pay for their homes more so than credit cards and other loans.
- What size is the 1st mortgage? Large 1st mortgages can be a risk for investors. In a worst-case scenario, if it goes into foreclosure and you have to buy out the 1st mortgage, do you qualify to do this?
- BFS clients (Do they owe GST or Payroll Taxes) some government taxes can be applied to a client’s home and in some cases, they can be put into 1st position.
- Strata Units can have issues due to special assessments or levies.
- Small Town / Recreational lending can have issues due to demand and length of time it takes to sell
General Terms For Private Mortgages
Primarily private mortgage terms are written for 1 year with interest-only payments. The reason being is it allows the client to correct their credit or income situation in hopes they will be able to refinance after that one-year term. If not, it is the option of the private money lender to offer a loan renewal and, generally, lenders will if the payments and conditions of the agreement have been met.
For the private lender, the 1-year term allows them to judge market conditions to verify if property taxes have been paid & fire insurance is up to date prior to offering a renewal.
Why Are Property Taxes So Important To Keep Up To Date In Private Mortgage Lending?
It is important to keep property taxes current because once you miss 3 years of paying property taxes, the home can be put up for tax sale.
Why Is Fire Insurance Important To Keep Up To Date In Private Financing?
If the fire insurance policy elapses on the property and there is a claim against the home there is no insurance to pay for the loss — which could significantly impact the security of a private mortgage.
Costs For Arranging Private Mortgages
Generally, the cost for arranging a private mortgage is passed onto the borrower.
Average list of Costs:
- Legal Fees
- Broker Fees
- Lender Fees
- Title Insurance
- Fire Insurance Binder
- ILA Independent Legal Advice
- Appraisal fees/inspection fee
Most of these costs can be added to the mortgage amount and paid out of proceeds. An appraisal fee will — generally — be an upfront cost as this is one of the factors that need to be determined ahead of arranging terms and rates.
Best Rate Of Interest On Private Mortgage Financing
Each file will have its own unique set of circumstances that will affect the rate but generally speaking:
1st Mortgage under 50% LTV can start as low as Prime + 3.05
2nd Mortgage under 50% LTV can start as low as Prime + 4.05
These rates are area-specific and case by case.
General Interest Rates for private mortgage financing:
1st Mortgage rates 7.95% and up
2nd mortgages 8.25% and up
Rates are subject to change based on variables in any given mortgage application.
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