Just because someone with equity in a real estate property, but also has bad credit, does not automatically mean that a private mortgage lender or subprime institutional lender will provide then with a bad credit mortgage.
There are varying degrees of bad credit which are taken into account by private mortgage lenders.
More specifically, for most private lenders, your bad credit status for them is all about the back story that explains how you’re credit got into a distressed state in the first place.
For instance, unexpected life events can occur that can impact your credit over a period of time such as divorce, job loss, family health, and so on. Even bankruptcy has a back story that a lender may be interested in hearing.
The key here is that most private lenders don’t mind financing people with bad credit, provided that the bad credit is not in a habitual state of irresponsible credit management.
If you have a low credit score due to a certain set of circumstances, but are now working your way out of the problem and are in the process of improving your credit score or have improved over the last number of months or years, then a bad credit loan is likely going to be readily available to you provided that there is sufficient equity in the property to cover off the requested amount of financing.
On the flip side, if you have had bad credit for a long period of time and your credit profile shows no signs that things are improving, or you’re doing a better job of managing your credit responsibilities, then its likely going to be harder to find a private lender interested in funding your deal.
This is not to say that you can’t get a private mortgage with really bad credit. But what it does say is that there are going to be fewer lenders that will be interested in considering your request, the loan to value amount offered will be lower than average, and the rates higher. And if there are any repayment issues, the private mortgage lender will be more inclined to acquire swiftly to collect the money due and take whatever legal means are available to them to reclaim the amount outstanding.
If you’re in need of a bad credit mortgage, or want to know more about what types of private mortgage options are available to you, I suggest that you give me a call so I can quickly assess your requirements and provide some bad credit mortgage options for your immediate consideration.
Sure, the value of the property and its condition are going to be important factors as well, but without cash flow there isn’t going to be a lot of interest from low rate providers like banks.
There are some exceptions to this when it comes to private lenders with respect to lower rates, but even lower rate private mortgage lenders are going to be interested in cash flow to a certain degree.
For a commercial property, there are basically three different cash flow generating scenarios.
The first and most common one is rental income from the tenants of a commercial building. Here a lender is going to be interested in all the specific leases or rental agreements in place, the strength of the individual tenants, and the amount of time remaining on occupancy agreements. In some geographies, its not unusual for a commercial mortgage lender to require that at least 80% of the leases or tenant agreements in place have at least as many years remaining on the agreements as the mortgage interest term that is being contemplated.
This is a good example of how you can set yourself up for better long term financing by getting tenant agreements in place for longer periods of time prior to applying for a commercial mortgage.
The second form of cash flow is the business revenues generated from a self occupied or owner occupied situation where the property owner is running a business within the building as effectively his or her own tenant.
In these cases, the financial statements of the operating company or companies occupying the commercial building are going to be scrutinized for cash flow to see if there is sufficient net cash to service the required commercial mortgage.
Sufficient cash flow will vary by lender with unique additions and subtractions to the income statement for non cash items. For the most part, the debt servicing requirement will fall in the range of 1.2 to 1.4 times the annual debt servicing. Put another way, the net adjusted business cash flow must be 1.2 to 1.4 times the annual principal and interest payments on the mortgage.
The third source of cash flow for commercial property financing is a combination of the first two whereby part of the building is rented out to unrelated third parties and part of the building is owner occupied.
In this scenario, all rent rolls and business operating company financial statements will be collectively reviewed to assess cash flow and debt servicing capacity.
If there isn’t sufficient cash flow to qualify for commercial property financing with a bank or institutional lender, then secondary lenders and private mortgage lenders can also be considered, but they will also have an interest in cash flow due to the higher loan amounts associated with commercial properties, and the need for the borrower to service debt on a monthly basis.
If you are in need of a commercial mortgage or are just planning ahead, I suggest that you give me a call so we can review your situation and discuss different commercial mortgage financing strategies that you could utilize either now or in the future.
The point though is to have a contingency plan in place in case that something goes awry with your primary financing strategy.
So what could go wrong with a standard residential or commercial property application?
All sorts of things.
And the more people involved (lawyers, appraisers, accountants, consultants, etc.) the more chance their will be a timing delay, a miscommunication, and request for more information, and so on.
Unfortunately, most people don’t think along these lines, and perhaps most of the time they don’t need to. But at the first sign of trouble, getting plan “B” into place can be a whole lot cheaper than the alternative.
The goal of any of my clients is to get the cheapest form of money possible and I always strive to get them what their looking for if at all possible. But the reality of the world of finance, especially when you are talking about non standard mortgage transactions, is that something goes wrong more often than you may expect.
And private mortgage financing is a great source for a contingency plan, based on the speed that deals can be put into place.
Unfortunately, many individuals that can qualify for an “A” mortgage facility will not even consider this as private money is viewed to be too expensive, or only applicable to the desperate.
But when you’re running out of time trying to close a deal that requires mortgage financing, the cost of a private mortgage can be a pittance compared to the cost of breaking a contract, or losing out on a great property purchase.
And a private mortgage only temporarily replaces the lower cost form of money you’re after as by definition it is only a bridge loan anyway. But by getting on in place in time to complete your business you have also effectively bought time to get something better in place to pay it out.
The key to a private mortgage contingency plan is not waiting too long to put one together.
As a general rule, you should allow two full weeks to get a private mortgage in place, although it can be possible to get this done faster.
If you find yourself a couple of months into a commercial mortgage financing process, for example, and are running out of time for some reason, then the private mortgage route may be the best short term option available to you.
To find out more about your private mortgage financing options on a given transaction, give me a call so we can quickly go over your requirements together and discuss private mortgage solutions that can be implemented right away.
Not only is it going to stay put, but much of the economic and financial prognostication seems to think there may not be any rate increase until May of 2012.
Here’s more on the recent BoC announcement … http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/07/deciphering-the-bocs-hieroglyphics.html
That’s the great thing about interest rates is that they are basically impossible to predict with an accurately.
But as the article referred to above mentions, all the careful wording, which everyone tries to analyze to death for clues, seemed to be pointing in the direction of nothing happening any time soon.
This is of course good news for variable rate mortgage holders who will be directly impacted by an increase rates.
The other side of this coin is that even though the overnight rate remains unchanged, rates are still going to have to go up at some point.
The access to cheap money is great, but it can also cause more problems in the long term such as inflation and overheating the economy.
One of the things the article also alluded to is something called the neutral interest rate, which was a new term for me.
Essentially what this refers to is a BoC overnight rate that should ideally move in the 2.5% to 4.0% range, depending on who you talk to.
This becomes an interesting metric for anyone that holds a variable rare mortgage in that upward movement in rates in the not so distant future are likely to move into this range, which would translate to a 1.5% to 3% higher variable mortgage rate.
So the key question then for variable mortgage holders is will they be able to afford their mortgage if rates increase to this “neutral interest rate range”?
If you can’t, there there’s still some time to do something about it, based on some of the projections that interest rates will not increase until next May at the earliest.
At least this gives you something to go buy. Its hard to answer the question as to whether or not you can afford higher interest rates when you don’t have any context as to what higher rates could be.
This is whole “neutral rate range” is not set in stone either, but does provide a measure stick of sorts to crunch some numbers against.
If you have any questions about variable mortgage rares and strategies you can deploy to reduce your lending risk, I suggest you give me a call and I’ll make sure you get all your questions answered right away.
A common request for a Scarborough private mortgage tends to relate to mortgage refinancing or debt debt consolidation where the applicant is trying to leverage the equity in their property.
But there are many, many scenarios where a private mortgage could be put into place through our lending partners.
While there are a lot of situations where bad or distressed credit may bring someone to private mortgage financing, this doesn’t have to be the case, and in many instances, private mortgage loans can be preferred over bank or institutional mortgage financing alternatives.
For instance, any time a Scarborough property acquisition transaction needs to be completed in less than 10 business days, the only realistic option to get funding in place can be a Scarborough private mortgage.
Yes, on residential properties, it can be possible for a bank or institutional lender to get something approved, closed, and funded in two weeks, but its hard to rely or depend on that happening due to the amount of people that are typically involved in a institutional mortgage transaction.
With a Scarborough private mortgage financing request, if all the loan requirements are in order, a private mortgage lender that services the area and has a focus on faster turnaround time with their lawyer and mortgage broker is going to be much more likely to be able to meet the required timeline.
With commercial mortgage financing, the process can take at least 30 to 60 days to complete provided there aren’t any unexpected delays in the application process.
A Scarborough private mortgage can be a good first step in getting a commercial mortgage in place in less time, which will in turn provide the time necessary to explore and secure a longer term bank or institutional commercial mortgage solution.
Construction financing in many cases is preferred from private lending sources due to once again to the speed of getting funding in place as well as the higher average level of predictability in the draw management process that is associated with private construction loans.
And for lower loan to value requirements on solid real estate properties, the Scarborough private mortgage funding rates can come close to what some banks and institutional lenders would be prepared to offer on the same property.
So regardless of your situation, if you’d like to explore your Scarborough private mortgage options more thoroughly, I recommend that you give me a call so we can go through your requirements together and discuss different avenues for private mortgage financing available to you.
Foreclosure property financing of a property you own that is presently in foreclosure with one or more of the existing mortgage holder(s) can be accomplished through a private mortgage lender, but there are some things you need to consider to be successful with this activity.
When a borrower is in a default status on their mortgage and the lender is taking a foreclosure action, an equity mortgage through a private mortgage lender is definitely a potential option, provided that there is sufficient equity in the property to support a new private mortgage financing decision in the borrower’s favor.
Its unlikely that a bank or institutional lender will be interested as they typically have tighter cash flow and credit requirements than a private lender which is why an equity mortgage is the most likely option.
For instance, if the current market value of the property is $400,000 and a private lender is comfortable issuing a mortgage commitment for 60% of that value, or $240,000, then the question is can this amount of money, and your available cash allow you to retain the property through a mortgage financing action?
First, and most straight forward, you payout the existing mortgage holder or holders with the funds provided by a private mortgage holder plus cash if more funds are required than what a private mortgage lender will provide.
Under this scenario, the mortgage lender is paid out, and the foreclosure action is stopped. You would then have a private mortgage in place with a term of one to two years at the most, providing you time to either improve your financial position so that you could qualify for a lower cost, longer term bank or institutional mortgage before the end of the private mortgage term, or take the time required to sell the property for maximum market value in order to preserve your equity.
Second, you could get the private mortgage lender to buy the existing mortgage that has put the property in foreclosure either for the face amount owing or a discounted price. Private lenders are more interested in this type of scenario if they can purchase the mortgage at a discount which increases their return on investment during the time remaining on the mortgage.
In both of these cases, the lending decision is based on the equity in the property, likely established by a third party appraiser.
When a borrower in foreclosure is looking to purchase the property out of foreclosure for a bid lower than market price, the financing equation can change quite a bit.
For instance, if you were successful in buying the property out of foreclosure for a winning bid of $300,000, instead of the fair market value estimate of $400,000, you have essentially been able to acquire the property at a below market price.
But, from a financing point of view, virtually all lenders will look at any sale, regardless of the circumstances, as the current value of the property. The logic holds that if the property was truly worth more, someone else would have been willing to pay more than what you did to get the property back from the lender.
So at a purchase price of $300,000, the lender’s 60% loan to value criteria now puts the maximum mortgage at $180,000 which may or may not work for you.
The key here is to make sure that you have equity to finance, otherwise you may not have sufficient leverage available to stop the foreclosure process.
First of all, a commercial mortgage is a mortgage financing facility provided against a real estate property that is zoned for commercial use. Put another way, all properties that are not residential have some form of commercial or industrial zoning classification.
A commercial property can be owned by an individual or a company.
When the owner is a company, the mortgage effectively becomes a commercial business mortgage.
There are basically three different commercial property scenarios where lenders will be asked to provide a commercial mortgage: 1) commercial rental property; 2) owner occupied commercial property; 3) a combination of owner occupied and third party rental or lease.
Under each of these scenarios a commercial lender is going to review the financial statements of the business, the business credit, and the collateral offered as security.
There can be significant deviations in credit criteria from one type of property to another and from one region to another.
Because of the commercial use the takes place on these properties, and the larger investment dollars that can be associated with the average commercial property compared to the average residential property, a commercial mortgage lender is typically going to require considerable third party verification of key assessment items before being able to commit and fund any financing request.
The most common third party verifications include a commercial appraisal from an AACI certified appraiser, an environmental assessment from a recognized environmental consulting company, and accountant prepared financial statements with varying review levels depending on the size of the commercial business mortgage.
A commercial business mortgage can be used to acquire a property, consolidate debt, refinance and existing mortgage, fund a construction project, or provide incremental working capital to the business entity.
Because of the additional assessment work required for a business type mortgage, the lending process through a bank or institutional lender will typically take from 60 to 90 days, with private mortgage lenders falling more into the thirty day range, provided that any required information is readily available.
If you’re in need of a commercial business mortgage and would like to find out more about your options, your next step should be to work with an experienced commercial mortgage broker who can properly assess your situation and provide you with relevant commercial mortgage options for your consideration.
For borrowers that fall into this classification, I would further divide them into two groups…those that miss qualifying by a lot and those that miss by a little.
For the near misses, its typically some combination of credit score and debt servicing that cause the application to fall under the line of acceptable lending criteria.
In these situations, a period of time from one to two years may be all that’s required to give them the opportunity to improve upon the areas that resulted in an “A” lender decline.
For individuals that miss qualifying by a lot, more time is typically going to be required to get their financing and credit profile to an acceptable level for lower cost mortgage interest rates.
Regardless of how or why an applicant gets declined by an “A” mortgage lender, the next step is to move into alternative mortgage options, or the sub prime lending space.
Alternative mortgage options include both institutional and private mortgage lending solutions.
With the current strength continuing in the Canadian real estate market in general, there are more sub prime options popping up post recession, providing more alternative mortgage options to both home owners and commercial property owners.
In addition to more alternative mortgage lenders existing in the market, we are also seeing more flexibility within some of the sub prime lending programs.
This is due mostly to institutional sub prime lenders wanting to hold onto their customers longer, either within the alternative lending space, or moving them into their own “A” credit products.
In many situations, the Alternative institutional mortgage options can be priced very similar to private mortgages with potentially tougher prepayment terms in the event that the borrower can the ability to move to an “A” lending product before the end of the mortgage term.
So for a borrower that is confident that they only need one or two years at the most to repair their credit to a satisfactory level, they may be better off going with a straight private mortgage that may even provide an open repayment option after so many months of the interest term have gone by.
One of the ways some the institutional alternative lenders are dealing with this is to provide adjustable rate mortgages with three to five year mortgage terms where the borrower can lock in their rate to a fixed rate in the future and benefit from better rates if they are able to improve upon their credit score during the mortgage term.
The good news for borrowers is that there are a number of different options to choose from, and depending on your situation and strategy for getting back to the “A” lending market, certain alternative mortgage options are going to be more appropriate for you than others.
The best way to figure out which option to select is to work with an experienced mortgage broker who can work through all the different potential scenarios with you.
Of course, this is not typical, but there are cases where you may be pleasantly surprised as to the type of private mortgage lending rates that are out there.
For much of the private mortgage lending market, a first mortgage can be priced in the 8% to 11% range. This reflects not only the risk associated with the mortgage being financed, but also the lender’s desired return on investment.
And because someone requiring private money right away may not be able to fully understand or have time to explore the market, they can end up paying a rate that is really higher than the underlying risk of the mortgage.
There is also a small slice of the market where individuals or groups of investors are looking to place private mortgages as an investment vehicle, and have extremely low risk lending criteria.
These individuals or groups are looking to do better than the returns from GIC’s, T bills, and bonds, but without taking unnecessary risk.
The solution for at least part of their portfolio is funding low risk private mortgages.
So for these low risk mortgages, how low can the interest rate go?
In scenarios where you have an excellent property in a very strong market and don’t require more than 50% loan to value, the private mortgage interest rate can get as low as 5% to 6%, with or without a lender fee on closing.
These are really terrific rates and for those lower risk scenarios, this type of money does exist.
But to gain access to it, you have to have enough patience to go through a more conservative assessment and decision making process than what you will find with most private lenders. Lower cost money is lower risk, which almost always moves slower as the decision makers for funding want to make sure that the risk level meets their criteria.
The other challenge with locating and securing the best private mortgage rates is that these specific private lenders are not all that easy to find as they don’t tend to have their own retail presence and in some cases do not even speak directly to the end borrowers.
The access to the lower rate and lower risk lenders is typically through an experienced private mortgage broker who they trust to bring them well qualified deals that meet their lending and funding requirements.
If you have a financing scenario that fits the lending criteria mentioned above and you’d like to explore seeing if you can qualify for a low private mortgage lending rate, then please give me a call so we can go over your requirements together and discuss potential funding solutions that may be available to you.
The are likely different explanations as to where the term hard money loan came from, but the way I explain it is that because a mortgage is being issued primarily on the basis of equity where the borrower has some combination of strained cash flow and/or credit rating, a private lender is going to act on any lending defaults very quickly because of the risk to them associated with payment defaults.
The comparison would be to a bank or institutional mortgage, where default in payments will still be responded to and dealt with, but potentially not as swiftly as may be the case with a private lender.
In reality, this makes good sense in that the private lender is already providing financing in situation where a certain amount of financial and/or credit distress exists in most cases. Therefore, the need to follow up on any default of payments or any failure to meet terms of the mortgage quickly, is going to be important to make sure the lender can recover their capital.
Hard money doesn’t mean that some rough looking customer in the image of a loan shark is going to break you leg if you don’t make a payment, at least it doesn’t in my world. Private lenders are secured by real estate and as such have legal rights to realize on their security in the event that a borrower does not make their required payments. There’s nothing really hard about it.
That being said, there are degrees of private mortgage lending and hard money loans.
For instance, the more distressed the borrower’s financial and credit profile, the lower the loan to value a private lender is going to advance and the more closely they are going to be watching the account for any problems with repayment.
But like any other mortgage commitment from any other type of lender, the borrower is required to meet the terms of the mortgage as is the lender. Any breach of terms will likely result on action being taken by one side or the other.
A hard money loan is not difficult to secure if you know where to find the private lending sources that would be interested in your financing request.
The challenge or hard part is that most private lenders do not have their own retail presence and many don’t ever even meet with the borrowers.
In order to locate a suitable source of hard money loans, you need to be working through an experienced private mortgage broker that has access to private lenders that funds mortgages in your area.
If you need a hard money loan or would like to know more about them, please give me a call and we’ll go over everything together.
But there can be other reasons whereby someone has come into additional funds and wants to use all or part of their incremental cash flow to pay down the mortgage balance.
Regardless of the reason, the first thing you need to do before providing funds to your mortgage lender with instructions to apply an amount to the principal balance outstanding is to understand exactly what the costs are going to be to do so.
If you have an open mortgage with a variable interest rate, there is likely not going to be any type of prepayment penalty.
But if you have a fixed interest rate mortgage, you may have to pay a prepayment penalty unless prepayment privileges are provided for in your mortgage commitment and you are staying within the limits of these privileges.
The basic rules around prepayment penalties on fixed rate mortgages is that you will have to pay the greater of interest differential or 3 months interest.
Interest differential is basically the difference in rate between what the lender provided to you when the mortgage was written and what the lender could lend out in the market today, multiplied by the remaining principal and time left on the interest term.
For an example of basic prepayment penalty calculator, here is one you can refer to by clicking the following link … http://www.canadianmortgagetrends.com/canadian_mortgage_trends/interest-rate-differential-ird.html
But the challenge with any type of calculator such as the one provided in the link above, is that they are based on one set of assumptions.
Each mortgage lender can have their own unique twists as to what goes into a prepayment calculation for any particular mortgage.
As a result, there can be large differences between what you THINK the prepayment penalty is based on your own math and what the lender actually calculates it out to be.
This why its important that if you are looking to prepay any amount of principal on your mortgage that you first contact the lender and 1) get their exact prepayment penalty calculation, and 2) their calculation on paper for you of what the penalty will be to you for a given scenario that you outline to them.
With the exact information in hand, you will be in a much better place to make an informed decision about whether or not, for example, a mortgage refinancing for a lower rate is going to be 1) cost effective in the long run, and 2) cash flow affordable in the short run.
In some cases, prepayment penalties can be substantial, so don’t assume you know the math until its verified with the lender.
That way you’re not going to be unpleasantly surprised by a larger than expected prepayment penalty after you’ve committed to refinance your mortgage.
The best way to decide what to do and get any relevant math correct is to work with an experienced mortgage broker who can go through all relevant scenarios with you so you know you’re making the right decision.
Most of the time, the lowest cost fixed rate mortgage programs are basically stripped down to the bone, not providing for any type of prepayment in excess of your scheduled payments that won’t trigger a prepayment penalty.
That being said, as rigid as these programs can be, some will still allow you to increase your payment once a year or provide other very subtle, low value benefits in exchange for the best mortgage interest rate they are prepared to offer.
This can be still be a very good fit for first time home buyers or people with rental properties where there is absolutely no intention to want to be paying anything additional down on the mortgage during the mortgage term.
For everyone else, its one of those buyer beware situations that you need to make sure that a slight reduction in interest rate does not automatically take away a prepayment privilege that may be valuable to you over the mortgage term.
There could still be situations in the future where even paying a prepayment penalty may still land you a net savings on a better rate, but you’re going to have to work through the math with your mortgage broker to make sure that is the case. And even if it is, you’re still going to have to pay the repayment penalty out of pocket and net the savings over time, so cash in hand would also be important to make this scenario work.
In any case, there are pros and cons to any mortgage program and if you’re truly looking for the best rate, you may have to compromise on some of the other features that are common with many of today’s competitive mortgage programs.
Before you make any sort of decision, the best course of action is to always be working with an experienced mortgage broker who can not only identify the program that meet your requirements, but also go through the specific terms and conditions of each program and how they may impact you in the future.
Even for nationally recognized lenders, they can have very different underwriting rules and rates for each of the different regions they operate in.
Most of the reasons for this relate to competition and risk which are also related to each other.
Let me explain.
The more risk any particular market is deemed to have, the less competition that will exist. For commercial property markets, the biggest risk to a commercial mortgage lender is a low volume, long sales cycle commercial resale market. In these areas, there has to be a greater lending focus on the more localized factors that are going to make or break the underlying business that’s servicing the debt as the security by itself does not provide as much comfort to lend money being that its hard to know when a lender pay be able to recoup their principal from a foreclosure action and how much they might get back when the dust finally settles.
A thinly traded market also tends to suggest lower amounts of commercial properties requiring financing, and still lower amounts of similar commercial properties being offered for mortgage security.
As a result, the harder the market is to operate in with respect to risk management, the fewer the players will be with respect to those that issue commercial mortgage financing facilities.
For the lenders that do service markets with lower levels of competition, the cost of borrowing is likely going to be higher than in a more competitive market.
Taking it one step further, regional commercial mortgage lenders can also be more stringent in terms of what they are prepared to finance and the terms they are prepared to offer because they know there isn’t going to be much alternative competition to what they are offering.
The tighter financing options available will also impact the cost of real estate as buyers will only be prepared to purchase properties where sufficient leverage can be provided.
The opposite is going to be true of larger metropolitan areas where active resale markets and higher levels of overall economic activity reduce lender risk which in turn increases competition for available commercial financing opportunities.
So unless your target property is located in or near a major economic center, there is a good chance that commercial financing will not only be harder to locate and secure, but the rates will be higher and terms more strict that what you could expect in other areas of the country, from the same or different commercial mortgage lenders.
If you’re in need of commercial mortgage financing, I suggest that you give me a call so we can go over your requirements together and discuss different commercial property financing options that may be available to your in your market area.