Most Canadians require a mortgage to buy a home. But the process of getting approved for a mortgage isn’t easy. You need to be in good financial health and meet requirements for income, debt, and credit score. So, what happens if you aren’t? In some cases, a private mortgage could be an alternative that will help you achieve your home ownership goals.
» MORE: How do mortgages work?
A private mortgage is a loan offered by an individual or institution to prospective homebuyers who are unable to secure a traditional loan from a financial institution, like a bank.
Home buyers may look to private mortgages if they have poor credit history and don’t qualify for traditional loans based on the regulations of other mortgage lenders. Private lenders are more likely to see the mortgage as an investment and therefore aren’t as strict regarding credit history and background checks. A private mortgage may also make sense if you’re buying a unique type of house, you don’t plan to own the property for very long, or you have a non-traditional source of income.
Private loans are often short-term, with typical amortization periods lasting six months to three years. It’s thought that, after making on-time payments over this term, the borrower will be in a better position to apply for a mortgage from a traditional lender.
The interest rates offered by private mortgage lenders tend to be significantly higher than those offered by traditional lenders, but mainly because the payments you’ll make on this type of loan are interest-only. With an interest-only mortgage, none of your payment goes towards the principal, so the total amount owed does not get smaller over time, as it would with a typical mortgage.
The process of getting a private mortgage can be much faster and easier than qualifying for a traditional mortgage. But know that those benefits come with higher interest rates, fees, and potentially more risk.
Private mortgages are offered by individuals, syndicates, and mortgage investment corporations. An experienced mortgage broker may be able to put you in touch with a reputable private lender, or you can search for one yourself.
While getting a private mortgage is generally faster and easier than qualifying for a mortgage with a bank, you’ll still have to meet some eligibility requirements. To qualify for a private mortgage, you need to have:
While a private mortgage has a shorter amortization period, and higher rates and fees compared to a traditional mortgage, there are some circumstances in which it might be worth considering:
» MORE: How much mortgage can I afford?
Private mortgages may be useful in some situations, but they’re not for everyone. Here are the main pros and cons to be aware of when it comes to private mortgages.
If you don’t qualify for a traditional mortgage, and you can’t get or don’t want a private mortgage, consider these alternatives.
Friends or family members who co-sign a mortgage add the strength of their financial profile while also assuming responsibility for payments if you fall behind. Co-signers can make it possible to get approved for a traditional mortgage if your individual income and credit score don’t meet lender requirements.
These types of programs are structured as a long lease with an option to buy the property at the end of a specified term. The idea is that you can move into the home immediately, but you have a longer time to save up and get into a better financial position to apply for a mortgage at the end of the lease.
These require a second property to secure the mortgage, typically the home of a friend or family member. Having the extra collateral will make it easier for you to qualify for a loan, but both parties are now responsible for it. If either party defaults, both homes will be at risk, so carefully evaluate other options before considering this one.
» MORE: What is a collateral mortgage?
This option isn’t common, but you may be able to negotiate flexible terms with the seller. The most popular example of seller financing is a Vendor Take Back (VTB) mortgage, in which they hold a loan for part of the sale price. However, the interest rate may be higher than for a traditional mortgage and you’ll need to find a mortgage lender that will allow this type of deal.
Sometimes the best thing to do is pause your house hunt. Take the time to get your financial health in order, pay off more of your debt, build a better credit score, and save up a larger down payment. When your finances are in better shape, you may be able to qualify for a mortgage with a traditional lender.
Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.