How To Become A Private Mortgage Lender:
Private mortgage lending 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 LTV’s 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
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 situations is the same and by allowing people to access funds in a nontraditional manner (i.e. Not using TDS & GDS ratio as well as verifiable income) enables clients to meet their goals as well as the investor to be paid very well for their assistance.
- Appraisal Reports or BC Assessments on lower LTV homes can be a good indicator for 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. (Low or high credit score is not always the true indicator). Rather look at the history over several years. Many times you can look at the credit report and see one particularly 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 home more so than credit cards & 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 a 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 clients personal 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 & length of time it takes to sell
Primarily private mortgage terms are written for 1 year with interest only payments. The reason being is it gives the client an opportunity 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 lender to offer a renewal and generally lenders will if the payments and terms of the agreement have been met.
For the private mortgage 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.
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.
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 and this could significantly impact the security of a private mortgage.
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 generally will be an up front cost due to this is one of the factors that need to be determined ahead of arranging terms & rate.
Each file will have its own unique set of circumstances that will affect rate but generally speaking:
1st Mortgage under 50% LTV currently June 2014 start as low as 5.48%
2nd Mortgages under 50% LTV currently June 2014 start as low as 6.5%
These rates are area specific.
General Interest Rates for private mortgage financing
1st Mortgage rates 7.95% & up
2nd mortgages 8.25% & up
*Rates are subject to change based on variables in mortgage application.*