How to Get a Private Loan with Bad Credit

How to Get a Private Loan with Bad Credit

Many Ontario home buyers are looking to take advantage of historically low-interest rates associated with all types of mortgages. Thanks to several dramatic measures taken by the Federal Government and the Bank of Canada during early 2020 to avoid the potential of widespread mortgage default, interest rates are now hovering as low as 2% and lower. Some types of mortgages have had interest rates as low as 0.99%. 

The Bank of Canada lowered the overnight bank rate to a record low of 0.25 in early 2020. This caused an overall drop in mortgage rates for all types of mortgages including fixed and variable rate mortgages. At the same time, the Government also stepped in to avert the potential of massive mortgage default as the effects of Covid set in by allowing Ontario homeowners the opportunity to defer mortgage payments for up to 6 months. The Government also provided the mortgage sector with 150 billion to back mortgage securities.

What if You Have Damaged Credit?

Despite the worst-case scenario not playing out as real estate experts had feared, many Ontario Homeowners have faced financial difficulties during the pandemic. According to Statistics Canada, consumer insolvencies rose 17% across the country and rose 15% in Ontario.  By year-end, there were a total of 7,658 consumer insolvency filings. 

Those Ontario homeowners who may be wanting to obtain mortgage financing may be turned down by traditional lenders and the banks due to bad credit, despite many having equity built up in their homes and other assets that could be used to secure mortgage financing. There are other Ontario-based lending options available. Private mortgage loans represent a very good option for those with credit issues.

What is the Difference Between a Private Lender and a Bank?

    Ontario has three types of established lenders that provide secured mortgage loans labeled A, B, and C lenders.

    A Lenders- Big Banks and large lending companies

    B Lenders- Trust Companies and Credit Unions

    C Lenders- Private lenders

    When credit is an issue and an Ontario homeowner’s credit score is considered too low to obtain a mortgage through a bank or even a credit union, a private lender (C lender) will be able to provide different secured mortgage options. Private lenders will consider other criteria, beyond creditworthiness when negotiating private mortgage loan options. The Banks rely primarily on credit standing when approving mortgage loans. 

The main differences between the bank and a private lender boil down to the bank’s heavy reliance on high credit scores and requirement for easy to prove yearly salaried income when determining mortgage loan eligibility. 

The banks have implemented stress tests that are very difficult to pass to qualify for mortgage financing. This makes the criteria very narrow for an Ontario homeowner looking for any type of mortgage loan including home renovation loans, second mortgages, home equity loans, or a Home Equity Line of Credit (HELOC).

A private lender will include other criteria beyond credit when determining mortgage financing.  Private lenders will include any additional assets you may have, including other sources of monthly income such as self-employed or investment income, and will include a current assessment of your property.

 A private lender will determine the loan to value (LTV) of your property and loan up to 75% LTV which represents loaning up to 75% or the assessed value of your property. A private lender will also determine the amount of equity you have built up in your property. Generally, at least 20% equity in your home is needed to secure different private mortgage loans. 

Is Private Lending Safe- Who is a Private Lender?

Private lenders are in the position to either lend out secured mortgages on an individual basis or there are groups of private lenders that will be able to negotiate terms for a bad credit mortgage as well as mortgage brokers specializing in private financing. If a private lender is loaning money on their own (not a mortgage professional) then he/she will be using your home as collateral to offer mortgage financing and will not require a license.

If a mortgage broker is providing a private mortgage loan, then licensing is required. The Mortgage Brokerages, Lenders and Administrators Act, 2006 dictates that all individuals and businesses in Ontario who carry out mortgage brokering activities must be licensed and register with the Financial Services Commission of Ontario (FSCO). 

In short, due to regulations that cover mortgage brokers as well as many well-established and experienced private lenders based in Ontario, private lending is deemed safe and considered a very good option for those that face credit barriers to financing.

How to Apply for a Private Mortgage Loan- What are the Associated Interest Rates?

Applying for a private mortgage loan is very straightforward involving a few basic steps:

1.Research private lenders in your area- It is important to do your homework and look at the different private lending options. If you require specialized help at a Mortgage Broker Store, we can set you up with an appropriate private lender that will be able to adapt the mortgage terms to meet your financial needs.

2.Get together all necessary paperwork before sitting down with a lender- Several documents will be required including a list of all current assets, proof of all monthly sources of income including investment and self-employed income. You will also need to bring a current appraisal of your home. 

3. Arrange a meeting with your Private Lender- It is important to meet directly with your lender to discuss all options that are feasible for you and your unique financial circumstances. Bad credit mortgages will be arranged based on your given assets and proof of income. 

    Interest rates attached to private loans depend on the type of mortgage loan applied for, the LTV calculated as well as the degree of equity built up in your home. Generally, the interest rates associated with private mortgage loans are between 7% and 10%. Depending on your financial specifics. You can expect to pay Mortgage loan fees ranging between 3% and 6%.

Mortgage Broker Store Can Help with Private Loan Options

    At Mortgage Broker Store we are well versed in the private mortgage loan options available for Ontario homeowners. We have access to a pool of well-established private lenders who will be able to discuss your specific mortgage loan choices. 

Don’t let poor credit stand in the way of obtaining mortgage financing to help with immediate costs such as home renovations, consolidating higher-interest debt, or paying for pressing expenses using the equity in your home. We are available to answer any concerns you may have and set you on the path to mortgage financing despite damaged credit.