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:
The document includes these important factors:
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.
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)
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.
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.
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.
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.