Private Lending Secured By Property
Private mortgage lenders in Alberta operate differently from banks and other mortgage lenders on many levels. One of the major differences is their source of funding – private mortgages get their money through individual investors or groups of investors. Some larger lenders have several different funding sources or include a pool of mortgages called a MIC (mortgage investment corporation) while smaller investors might simply lend out their own money. No matter the case, Kahane Law Office helps lenders and borrowers with private loans secured by a mortgage in Alberta. With offices in both Calgary and Edmonton, our real estate lawyers provide the legal help needed.
What Is A Private Mortgage?
Private mortgages are usually short-term. For example, most terms only last a year or two. They often have higher interest rates than bank or credit union mortgages, and often carry a lender fee and a broker fee. These fees can often be paid up front or subtracted from the proceeds of the loan. Many private mortgage lenders require the borrower to pay their own legal and appraisal fees, as well as the legal fees of the lender.
Another difference between bank mortgages and private mortgages in Alberta is the application process. Instead of the borrower being scrutinized, the property is what gets the most attention from a private lender. This is because private mortgages in Alberta are uninsured, meaning the lender must fall back on the property should a default occur. For this reason, properties in smaller towns or rural areas likely won’t qualify for as much money with a private lender.
Their primary criteria is the condition the property is in, where it’s located and how easy it is to sell if the borrower gets into trouble. If that fits, they look at the character of the client, their ability to repay, and the purpose of funds, very seldom will they verify borrower income, which can be attractive to many real estate investors. Since the equity in the property is key, these loans often go by the term “equity loans“.
When People Use Private Equity Loans
Private mortgage loans and bank mortgage loans ultimately serve the same purpose of helping people become homeowners. However, private mortgages are useful for unique situations that institutional mortgage lenders are not willing to lend in. When the bank says no, a private lender can step in to help to get the deal done. Whether purchasing a home or refinancing, a private lender can be useful when other options just aren’t available. Often equity in the property is the easiest way to ensure you qualify for a private mortgage – even when income is difficult to prove and credit is poor. Private lending isn’t just for people with damaged credit or difficult-to-prove income – it’s also useful when building a unique home or a home in an area that traditional lenders aren’t willing to lend in.
The alternative approval process of private mortgage lending means that these loans can be useful for people like self-employed individuals and small business owners. Someone who is recently self-employed, for example, may not have a long enough income record to obtain a bank loan, but may still be comfortable paying off a mortgage. Other people who may be able to benefit from private lending include:
- People wishing to rebuild their credit history;
- Individuals in need of quick financing;
- People who need a short- term loan;
- Borrowers who are purchasing unconventional properties;
- Home buyers or homeowners with self-employment income or other types of non-confirmable income;
- Buyers who want to self-build a home;
- Borrowers in need of interim (bridge) financing; and lastly
- People who want to use the equity in their home to refinance and consolidate debt.
Why People Use Private Mortgages
People use private mortgage for any number of reasons. For example, people most often use them for:
Buying A Home
Every home is different, and so is every home buyer; what may be ideal for one buyer may be problematic for another. The same applies to mortgages. Since home buyers are so diverse, there are a variety of mortgages available to suit people with different financial needs. While most mortgage loans come from banks, credit unions, and trust companies, there are some cases where turning to a private mortgage lender can be advantageous.
For example, if you have been turned down for a bank mortgage because of your credit history, but are still able to pay back a short term loan, you may be able to rebuild your credit history using a private loan. This type of solution is not for everyone, but for those in the right situation, private lending can make home buying a reality.
Using equity In Their Home
Further, private mortgages most frequently fund equity take outs. These include smaller loans where people borrow against the equity in the home. Most often, this happens when a person needs cash for travel, debts, or emergency repairs to their home.
Private lenders are often evaluating mortgage applicants on a similar, but different set of criteria, than the banks. While banks look at four main criteria: Income, Credit History, Equity, and Property Marketability, private lenders are often dealing with applicants that are not as strong in at least one, or possibly two, of those categories. A borrower with unverifiable income, for example, may still qualify with a private lender if they have a good marketable home in mind and sufficient equity (usually at least 15% equity but up to 35% or more may be required). The same applies to a borrower with a verifiable income, but a poor credit history. In general, if there is a good marketable property and sufficient equity you can usually qualify for a private mortgage.
Foreclosure On Private Mortgages:
Foreclosure is the legal process through which a mortgagee (i.e., a lender, usually a bank) attempts to recover the balance of a mortgage when a borrower fails to make payment. Our foreclosure lawyers assist clients with these when needed. Generally, this takes place by taking ownership of the property in question of forcing the sale of that property.
Process From A Borrower’s Perspective
Default occurs when a borrower does not fulfill the specific promises they made under the mortgage. The most common form of mortgage default is failure to make a scheduled payment. However, other actions can also constitute default, including:
- Failing to insure a property;
- Allowing significant damage to occur to a property; and
- Failing to pay property taxes or failing to make other payments, such as condo fees.
Each mortgage agreement will outline terms, conditions, and expectations, including what constitutes a default.
Process From A Lender’s Perspective
In most cases, a lender can look to foreclosure as soon as even one mortgage payment is missed. However, foreclosure can be a lengthy process. Consequently, a lender may not necessarily pursue foreclosure as a first option where there is a default.
In many cases of default, a lender will first attempt to contact the borrower to remind them of their obligations under private mortgage and to demand payment. In some cases, this may lead to discussions with a borrower and attempt to reach an alternative payment plan (if possible) in lieu of pursuing foreclosure.
If these discussions are not effective, or the borrower is unable to commit to making payments, the lender and borrower can proceed with a Quit Claim. This means that the title is transferred from the borrower to the lender and the foreclosure process can be avoided.
How Kahane Law Helps
Kahane Law Office acts for borrowers or lenders with respect to private mortgages. We only act for one side in these types of transaction in order to avoid the inherent conflict with them. No matter the situation, connect with us today. With both a Calgary office and an Edmonton Office, we assist clients across the province. Please email our team here. Emails allows us to get the information we need to help right away. Alternatively, please call our office in the Calgary area at 403-225-8810 or, for help in Edmonton call (780) 571-8463