Private lending is often an overlooked solution to financing problems. Misconceptions, myths and mystery surrounds private lending.

There are a variety of lenders that could be called private lenders, for which the fees and costs of financing vary substantially.  The private lender can be difficult to access if you don’t know where to go and many borrowers end up with very costly solutions when they answer ads on the radio. Some of the benefits to using a private lender is that, in many situations, there are more opportunities to customize the mortgage that the borrower needs and, in many instances, fees can be lower than other institutional private sources.

How does private individual lending work?

A mortgage broker who specializes in private financing can help a borrower by placing their loan with a private lender who is familiar with the area. An individual lender seeks a better return than bonds and does not want exposure to the stock market; instead, an individual lender wants to earn a return from real estate without directly owning it.

A private mortgage is generally short term in nature (a few months to 2 years), is secured by real property (with the mortgage registered on the title, and the return is the interest that the borrower pays.

The lender will make an offer on the mortgage stating the terms that they require to lend the mortgage. There can be a negotiation and private lending offers opportunity to tailor mortgage requirements more so than an institution who only offers certain mortgage products that may or may not be open and may or may not have other requirements. When an agreement is reached, a lawyer or notary will prepare the necessary documents and a charge will be registered against the property just like any other mortgage. Private financing does cost more that conventional financing, and private money is a market like any other which is moved by supply and demand; the price of which fluctuates accordingly.
The following are some of the situations where private financing offers significant benefit:

1. A private lender, may lend more on the basis and merits of the property so if a borrower has less than stellar credit or a lack of credit or has a difficult time proving income but the property itself holds good value, the private lender will lend on the merit of the property whereas a conventional lender will decline it.

2. Private borrowing can also work for properties which are held in a trust or in a company. Most banks won’t lend to a trust because they require a personal guarantee.

3. Private lending is also a good solution for temporary needs, such as when a borrower feels that in a short time their credit may be good enough to get conventional financing or if they are waiting for another deal to close in order to release funds to use for the new deal. This works well with private money because most private mortgages are for relatively short terms, 12 months or 24 months.

4. Private mortgages can even be negotiated to be ‘prepaid’ mortgages, such as when the borrower won’t be able to make monthly payments; this way the borrower simply pays the whole amount (including the capitalized interest amount) back at the end of the term. This especially makes sense for someone who is selling their property and knows they will have the funds to payout the mortgage within the term of the mortgage.

5. Private lending is also a potential solution if the location of your property is outside of where a conventional lender is willing to lend.

6. If you are in the process of being foreclosed on, a private mortgage may be able to save your property by refinancing the loan that is in arrears.

A private lender has the same rights as a bank when it comes to being paid. If the mortgagor is behind on payments the private lender has the right to pursue foreclosure just like a bank would in accordance with provincial or state laws. As well, if payments are late, it is typical for a charge to be added which would be defined in the mortgage agreement. What is important to remember is that for the extra cost of financing the borrower has the opportunity to negotiate what terms are important to them to make the deal work and a private mortgage broker can help with this as a liaison between the borrower and the private lender.

Private lending might be the right solution for you, but it’s worth nothing that it is not a solution to buy property with no money down. Realistically, in the current market, most private lenders will not lend above 80% of the property value, so you need to have at least 20% equity (and commercial properties need even more). Private mortgages can be in first or second position, and possibly a third depending on the amount of equity. They can be used for residential, commercial and even in construction financing.

If you have further questions regarding private mortgages, refinancing, debt consolidation or second mortgages please contact us at mail@alphaaugust.com.

Here is a list of questions you should ask before you are taking a new mortgage on:-

What is the term of the loan – Often with private lenders the term is only a year or two. If you need a short term fix, a short term loan might be good. But, if after one year the lender will not let you renew and you will not have the money to pay back they are likely to initiate foreclosure proceeding.

What are the upfront costs – These can mount to few thousands of dollars, especially if you are already in financial stress and your credit score is not that great.

What are the payout penalties – Payout penalties can be extremely high. The highest I have seen was 6 month interest.

The most important question to be asked is “Can I afford the monthly payments?”

I was talking to a home owner in the Vancouver area who has 3 mortgages on his property. He has spent thousands of dollars in upfront fees and now he cannot afford the payments so he wants to sell the property. Once the property is sold, he will have to pay penalties on all three mortgages, which will cost him an additional $8,000. Had he asked himself the questions listed above ahead of time he would have probably concluded that selling was his only way out of the hole and would have saved himself more than $10,000 in fees.

Want somebody to talk to ?  Feel free to contact us.

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What do you think?

A private lender would typically provide a home owner in foreclosure with a loan value up to 70% of the property value. Depending on the location the interest rate may be as low as 7%.

If you would like to explore this option, please contact us as soon as possible. Modern Home Solutions is associated with few mortgage brokers that are specialized in providing loans to home owners in foreclosure. The mortgage brokers we work with have a deep understanding of your situation. In addition to providing a new mortgage they may, if needed, talk to the bank’s lawyer to help pause the foreclosure process and save on legal fees. Once the foreclosure is stopped thanks to the new financing the mortgage broker will also work with you to improve your credit score so that you can get a conventional mortgage with a lower interest rate within a year.

If you prefer to look for a new mortgage by yourself make sure you fully understand what you are getting into.  For more details check out my post about getting  a new mortgage from another lender.

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You will also have to serve the lender with 2 copies of the filed response to petition and 2 copies of each filed affidavit if any.

If you have been served with a petition and do not file a response, the lender is not obligated to give you notice of the time and date of the hearing of the petition and there will be a hearing without you .

The time frame that you have to prepare, file and deliver a response to the petition is:

• If you reside anywhere within Canada, within 21 days after the date on which a copy of the filed petition was served on you
• If you reside in the United States, within 35 days after the date on which a copy of the filed petition was served on you
• If you reside in the elsewhere, within 49 days after the date on which a copy of the filed petition was served on you

Note: Court forms are available at www.ag.gov.bc.ca/courts/other/supreme/2010SupRules/info/index_civil.htm

I put Phil in contact with an excellent Realtor and within a week he had a very good offer.

Still, the funds were about $10,000 short of what was needed to complete the deal (Realtor fees included). This is when the 2^nd mortgage lender was contacted by Phil’s lawyer. The lawyer negotiated a short sale with the lender and he has agreed to accept $10,000 less than the amount owned on the 2^nd mortgage. The deal has closed this week.

Why did the 2^nd mortgage lender agreed to give up $10,000?  Whenever a property is sold the funds are distributed according to a list of priorities, first in the line is the strata followed by unpaid taxes and utilities, 1^st mortgage lender and only then 2^nd mortgage.  The longer a foreclosure process takes the more debt accumulates. The funds that will remain for the 2^nd mortgage lender go down every day. Also, it was clear that the offered price was very reasonable. It was in the 2^nd mortgage lender’s best interest to accept the offer and walk away with some money rather than cause a cancellation of the deal and end up with much less money after the court orders a sale.

This type of sale is called short sale. A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. In recent years short sales became very common in the US. But, in Canada they are still very rare for many reasons which I will not go into here.

I’m renting an apartment in Vancouver and I’ve just received ‘petition to the court’. It seems that my landlord has not been paying the mortgage on the place we’re renting. What do we need to do? Should we find a new place to live? Will we get our deposit back?
Are our belongings safe in the flat?

This was my answer:

Even if the bank will eventually sell the place, there is still some time before this happens. Depending on the specific property you still have 2~7 months . Nobody is going to go into the apartment tomorrow and take possession  and I am sure your belonging are safe.

On the legal side, you may read this publication: cantPayYourMortgage.pdf – on page 16 there is a chapter for tenants.

As a first step, I suggest you contact your landlord and ask him if he has done anything to stop the foreclosure. I find that many homeowners solve the problem way before it gets the point the bank needs to sell it. ( You can also refer your land lord to www.ForeclosureHelpBC.com )

I also recommend you call the bank’s lawyer and ask for more details, this may help you understand how much time you have.

This is what email said:

“I am writing this email about Michelle Castillo from Modern Home Solutions. I want to thank you for going the extra mile, as I had a very unusual situation on a foreclosure problem. I phoned and talked to more than a few financial institutions and Michelle was the only one who listened to what I had to say and the dilemma I was in. She worked very hard to pull my property out of foreclosure. The fees were reasonable and She listened to all my problems and then she came thru for me. I cannot thank you enough for everything you have done.  You are my HERO!”

The home owner in this case had a rent-to-own tenant in the property.  The tenant had an option to buy the place for an agreed price within 3 years. He had already done some renovation to the place when he found out the owner had stopped paying the mortgage and that the property was on the verge of foreclosure. He would have lost all his investment and would have to move out.

The owner called in the beginning of March and told me what happened.  She had admitted she have done some mistakes and was looking to fix the problem.

Must admit it took me many hours to come up with a solution. It included:

• Talking the bank’s lawyer and make sure they will approve the new arrangement and allow reinstatement of the mortgage
• Provide 2^nd mortgage to owner to pay arrears owing on the mortgage
• New rent-to-own agreements that allows my company to control the property and make sure mortgage is being paid.
• A promissory note between the owner and tenant that ensure she will compensate him in the future for some of the losses he will still need to carry as a result of these new agreements .

Now everything is back on track and everybody is happy.

M. wanted to know what to expect next.  He was basically trying to see how long he can still stay in the house and he was looking for ideas how to make the process longer. Well, I am not a lawyer and am not a specialist in giving bad advice to homeowners. I actually recommended he cooperates with the realtor. What is most likely to happen if an owner does not cooperate with the Realtor is that the bank’s lawyer will go to court and get an order to show the house with the help of a bailiff. All costs will be charged back to the owner and he will end up in the same place but owing yet another few thousands in legal fees.

Note: If the sale proceeds don’t cover all that is owed, the lender still has a judgment against the owner for the remaining amount. They can try to collect this from for up to 10 years; after that, they can renew the judgment. It is always at the owner’s best interest to minimize the amount owing.

One more thing I have learned from M. Is that the realtor intends to estimate the house value and the asking price by himself after seeing the place. I reminded M. the he has the right to appeal to court if the proposed selling price is too low.

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One more detail worth mentioning – He also has a line of credit secured by the house and is currently in good standing. I did recommend making every effort to keep this one in good standing. Having one more foreclosure proceedings running in parallel will double the legal fees, clearly not a desirable situation

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