Before Contacting a Private Lender

If you are reading this blog post, you may be researching or considering borrowing funds from a private lender for a first or second mortgage.

Before you contact a private lender or a similar source of funding, we suggest you read further. There are many facets that may prove costly when borrowing from a private lender. We are not implying or trying to persuade you in any direction, other than suggesting you also include a discussion with a lawyer before you make that initial private lending first contact. We’ve included a few factors in this blog post that are worthy of your consideration before making that first step.

Although it may appear obvious, we do suggest revisiting the option of talking with your bank or traditional lending institution one more time, even though they may have denied you funding in the past. Circumstances can change, banks have been known to approve mortgages that they previously declined in the past. Trying one more time could save you significant funds, time and worry. If your bank still denies you funds, another source may include contacting a family member or close friend who has the means and capability to assist you with your financial needs.

Our document ‘Six Factors to Consider Before Contacting a Private Lender’ outlines in detail, the areas that you will want to understand about private lending, including:

• What Is Private Lending?
• Why Do People Use Private Lending?
• Who Are Private Lenders?

The document includes these important factors:

1. Risk of Losing Your Home
2. The Fees
3. Hidden Costs
4. Renewal
5. Early Payout Penalties
6. Administration Work for the Borrower

The factors listed are not intended to be all encompassing; however, the document does offer some of the elements that can be encountered from private lending experiences.

Risk

As a borrower, you do risk losing your home if you are delinquent with your payments to your private lender. There may be some flexibility if you communicate your situation with your private lender, however you should be capable of meeting your financial obligations to the private lender and your primary mortgage lender(s)

Fees

Understanding the private lending fees that are involved is paramount, and one of the many examples of why having a lawyer involved, proactively, is critical with a private lending transaction. There are fees that appear straightforward
and there are fees that may appear in the fine print and others that may not be included in the initial lending summary. These fees may include interest, brokerage, all legal fees (yours and theirs), administration fees, appraisal fees and possibly more. There are other intangible or hidden costs that the ‘Six Factors to Consider Before Contacting a Private Lender’ white paper includes that are worthy of your review.

Renewal

If you are in the position that your current financial situation may be longer than one year, you will need to take a very proactive approach. There are additional renewal fees related to administration and possible increase in the interest rate. If you decide to proceed with private lending, you will want to start planning a possible exit strategy immediately prior to the private lending agreement’s renewal, should the private lending parameters change. This proactive effort should start as soon as possible so you can expand your options, should the private lending renewal fees and agreement not meet with your approval.

Private lenders and private lending brokers can be very accommodating (don’t leave it until the last minute, start the renewal option discussion as soon as possible), so it doesn’t hurt to have a discussion with them. And don’t forget about trying again with traditional lending like the banks, as your financial position may now be acceptable to a bank. These activities should start at the very beginning of your private lending agreement, throughout the term and prior to renewal.

Early Payout Penalties

If your circumstances change, perhaps you are successful with your proactive efforts to get bank approval to pay out your private lending agreement, and you decide to payout the private lending agreement early, be prepared for early payout fees. These fees should be explained and detailed prior to your signing the private lending agreement and another reason why you need a lawyer involved proactively.

Administration Work for the Borrower

Borrowing from a private lender will require a great deal of administration work on your part, be prepared to provide financial details in advance of working with a private lender, during the agreement (lots of paperwork, post-dated cheques) and if you are renewing there will be additional paperwork. It would be a best practice to be very organized, proactive and detail oriented.

The ‘Six Factors to Consider Before Contacting a Private Lender’ white paper provides additional details about private lending and the need to have a lawyer involved at all steps of the private lending arrangement, and especially prior to engaging with private lending.

Nichols Law Professional Corporation (Nichols Law, NLPC) has been helping clients throughout the Greater Toronto – GTA area, York Region and Markham, with their real estate, estate planning and business legal needs and issues for over 30 years.

The Mortgage Stress Test: What It Is and Understanding Your Options

Your First Home

One of the first things that a young couple envision for themselves is buying a new home and possibly starting a family. In addition to having a home to live in that they can call their own, there is the added benefit that a home purchase is usually a solid long-term financial investment, especially due to the tax-free growth on the home’s value.

Can You Afford That Home of Your Dreams?

Thinking about buying a home is one thing, affording the home you want to purchase is another, especially if you live in a hot housing market where house values may be out of reach for those young couples or families that are just starting out. How do they get started with a new home in the city they want to work and prefer to live in when house values are so high?

New Federal Affordability Regulations

Another factor is for those couples who have not yet entered the real estate market and purchased their first home, will now need to pass the federally regulated financial or mortgage stress test. Interest rates are very low these days, the government wants to ensure you can not only afford the home you buy today, but also be able to afford that home in the future should interest rates rise.

As of January 1, 2018, anyone applying for a mortgage from a traditional bank (TD/CIBC/Scotia/BMO & RBC), will be subjected to a financial stress-test. The stress-test requires that you prove your income can support a mortgage interest rate approximately 2-2.5% above the average prime mortgage rate. Because of this new stress-test, the borrowing power of young individuals who are just trying to get into the real estate market, has been substantially reduced or removed altogether.

 If Your Bank Won’t Loan You Money, A Private Lender May

As a means for qualifying for a mortgage, some individuals are borrowing money from private lenders, as opposed to conventional banks. A private lender is simply an individual or corporation who is not regulated by the same financial borrowing rules that the conventional banks are. As a result of not being subject to the same financial regulations, private lenders are able to loan money, without requiring the borrower to pass the new financial stress-test, however even private lenders have lending criteria for approval.

While this may seem appealing at first glance, there are costs associated with borrowing money from a private lender, as outlined in our white paper ‘Six Factors to Consider Before Contacting a Private Lender’ which is a good reference for the fees and efforts that are associated with borrowing money from a private lender.

There May Be an Alternative to Private Lending

As an alternative means for young individuals to qualify for a conventional mortgage under the new stringent financial requirements, young individuals may have their parents or close relatives join them as co-owners / co-mortgagors. The result of having a parent or relative join as a co-signor of a mortgage is such that, the parent’s/relative’s income will be added to the young individual’s income, when assessing whether they can pass the stress-test. In some cases, the combined income of a parent/child is enough to pass the financial stress-test and allow the young individual to qualify for a conventional mortgage. While this option is not available to all young individuals, it is recommended that young individuals explore this avenue, as a means for qualifying for a conventional mortgage.

You may want to read NLPC’s ‘Six Factors to Consider Before Contacting a Private Lender’ white paper, which provides additional details about private lending and the need to have a lawyer involved at all steps of a private lending arrangement, and especially prior to engaging with private lending.

Nichols Law Professional Corporation (Nichols Law, NLPC) has been helping clients throughout the Greater Toronto – GTA area, York Region and Markham, with their real estate, estate planning and business legal needs and issues for over 30 years.

Is Private Lending Your Only Hope of Buying a New Home or Keeping the One You Have Now?

Borrowing from a private lender is a serious undertaking. If you are considering borrowing funds from a private lender, there may be a compelling event happening in your life, otherwise you wouldn’t be taking this step. A private lender will use your home’s available equity for security, which is important to remember.

Why Do You Need the Funds?

Perhaps you want to buy a new home, and were declined a mortgage from a traditional lending institutions (chartered banks and trusts), or you didn’t pass the mortgage financial stress test that has been recently regulated.

There may be other reasons for using a private lender, you may be starting a business, need vital capital and funds, Getting access to private lending funds may help you keep the home you have now instead of having to sell your home to get access to your home’s equity.

Private Lending May Be Your Only Option, Maybe Not

There may be numerous important reasons why you need these funds. Borrowing from a private lender for less critical requirements may not be prudent, for example, borrowing for a vacation, unnecessary home improvements, investing, buying a car, you get the idea, would not be a prudent use of private lending. The private lender will secure their loan with your home’s equity, no different from a bank, and if you stop making your payments they may start the process for foreclosure or power of sale.

Is private lending your only hope? If traditional lending institutions and their partners will not provide you with the funds to buy a new home, renew your current mortgage, or start a business, as examples, then perhaps private lending would be a fit for you, unless you have a family member or friend who has the means to lend the funds you need. Whether you are securing a second or third mortgage through a private lender, you still need to meet all your financial obligations, if not, you risk losing your home.

A Reason for Being Optimistic

Securing funds from a private lender may fill a financial gap until you are more credit worthy and have funds or capital to pay out the private lender, funds you may only need in the short term. After a short period of time you can try approaching the traditional lending institutions and banks again, who may be more amenable to loaning you the funds you need or approving a mortgage.

A private lender may help you with the funds you need to fill a temporary financial income gap, start a business, or as an alternative when you are recovering from a bankruptcy or a consumer proposal when your credit is poor and traditional lenders will not loan you the funds you need. These are critical reasons why people use private lenders, if you have the means to make all your payments.

As we have outlined in our white paper ‘Six Factors to Consider Before Contacting a Private Lender’, we do suggest you revisit securing funds from the traditional lending institutions and their lending partners, if you tried one bank, try another, if not them try again with another. Once you have exhausted the traditional lending institutions, your family and friends (‘The Mortgage Stress Test: What It Is and Understanding Your Options?’), then, perhaps you may want to pursue borrowing funds from a private lender.

Nichols Law Professional Corporation (Nichols Law, NLPC) has been helping clients throughout the Greater Toronto – GTA area, York Region and Markham, with their real estate, estate planning and business legal needs and issues for over 30 years.

Is Private Lending Your Only Source for Funds if you are Recovering from a Poor Credit or Consumer Proposal?

There are many reasons for considering private lending, several of these reasons and topics we have covered in previous blog posts including “Is Private Lending Your Only Hope of Buying a New Home or Keeping the One You Have Now?” and our white paper “Six Factors to Consider Before Contacting a Private Lender”.

A Financial Crisis of Your Own; Bruised or Bad Credit

There may be another reason why you need to borrow funds from a private lender, and that reason is that you are experiencing a serious financial crisis.

Perhaps you were part of a downsizing with your career and only have your spouse’s income to try and make ends meet, and the only source of funds that you have access to is the equity in your home to help you manage this financial crisis and income gap.

Consumer Proposal

To make matters worse, you may have had financial issues with your current lenders and were forced to submit a Consumer Proposal, which has had a dramatic and negative effect on your credit rating and now traditional lenders will not lend to you until your Consumer Proposal obligations are fulfilled, which may be years.

Filling a Financial Gap or Avoiding a Crisis

If you have enough equity in your home to appeal to a private lender, have been responsible with your financial obligations and payments for the most part, and have a steady source of income to meet your financial obligations, a private lender may be the answer.

Is a private lender your only source of funds? It depends on many factors, one of them is ‘timing’. If you have exhausted traditional lenders, such as the banks, and I mean exhausted, have tried all the banks or you don’t have a family member or a friend with the means to help you out of this financial jam, then you may only have a couple options. At this point in time, if traditional lenders won’t lend you funds, and you don’t have other sources for lending, the timing may only offer one alternative, private lending

Out of Options?

One of those options may include the selling of your home, which means you are out of the housing market as a tax friendly investment, and out of your home and the neighborhood you may really like. And, if the market is low, having to sell at below market value. This also means you may have to rent a home instead of trying to buy another, which may be difficult if you can’t get approved for a mortgage. If traditional and private lenders won’t lend to you, this may be your only option.

Private Lending May Be Your Last Hope

If you do have adequate equity in your home, have been mostly responsible with your financial obligations, and even if you had credit issues, have submitted a Consumer Proposal or had a Bankruptcy, a private lender may still lend funds to you, at a cost. Many of these costs have been outlined in our white paper “Six Factors to Consider Before Contacting a Private Lender”.

Private Lending as a Short-Term Solution

Securing funds from a private lender shouldn’t be for the long-term. We have outlined factors in our white paper that make suggestions about private lending as a short-term strategy and suggest that if private lending is a source of funds that you are considering, that you speak with a lawyer to help you with this borrowing alternative.

Even though there are many fees and costs involved with private lending, private lending can be a viable solution, if you take a responsible and proactive approach with this borrowing alternative, are somewhat detail oriented and approach this method as a short-term strategy.

You may want to read NLPC’s ‘Six Factors to Consider Before Contacting a Private Lender’white paper, which provides additional details about private lending and the need to have a lawyer involved at all steps of a private lending arrangement, and especially prior to engaging with private lending.

Nichols Law Professional Corporation (Nichols Law, NLPC) has been helping clients throughout the Greater Toronto – GTA area, York Region and Markham, with their real estate, estate planning and business legal needs and issues for over 30 years.