Things You Need to Know When Dealing With a Private Mortgage Lender
December 22, 2015 | Posted by: Ron Chan
Here is a list of things you need to consider if you are contemplating on using a Private Mortgage Lender:
- Is there a loan document? Just like the banks, private mortgage lenders should have a loan agreement or loan document that details the terms and conditions listed below. Ideally, the loan document should be presented and open to independent legal advice. In other words, know exactly what you will be committing yourself to by seeking the advice of a lawyer to represent YOU!
- What are the term(s)? Typically, private mortgage lenders only want short term mortgages. Therefore, you should find out how long the obligation is i.e. one year or two years etc. An important thing to consider is at the end of the term will you be able to get re-financing? If you feel that your situation may not improve by the end of the term you should try and negotiate for a longer term...especially if you have bad credit habits.
- What is the rate? The rate is important as it forms the basis of your monthly payments. Also important is the renewal rate, if you need to renew with a private lender you should get this rate before hand. This is crucial especially if at the end of your initial term you are still challenged with re-financing options. Leaving this question unanswered or pre-negotiated could be a ticking time bomb as the lender could jack up the rate making your mortgage renewal unaffordable...ultimately leading to a possible foreclosure on you.
- What is the amortization? This is the period of time in which it would take to payoff your mortgage. The key here is understanding how amortization affects your payments...a shorter 'AM' say 15 years will result in a much higher monthly payment than a 25 year 'AM'
- Is there a renewal clause or penalty? Having this negotiated up front will help you with options at the end of your term. When it comes to mortgage financing you should ALWAYS leave yourself with as many options as you can get.
- Is there an early payout provision? What happens if you are able to re-finance at better rates? Can you get out of your existing arrangement? Remember, private mortgage lenders are not much different than banks they need to meet their obligations too. Simply put, lenders are in the game of renting or supplying money and look to get a return on their money or earn a profit. In many cases, private lenders because they generally have a good credit rating will borrow from a bank at a lower rate and lend to you at a higher rate. This is the spread, and it represents the income a private lender can make as a result of lending you money.
- What happens in the event of default? What is the process that the private mortgage lender will take should you happen to default? One of the most common defaults is a missed mortgage payment. Typically, mortgage lenders need to advise you that you are in default and need to give you a period of time to remedy the default. It's important to understand what happens if you can't make good on the default...in many cases it could lead to foreclosure.
- What is considered a default? This should be detailed in the loan agreement...as said earlier, the most common one is missed payment. But, other things such as unauthorized renovations, late payment on taxes or utilities could mean you are in default.
- Are there penalty fees associated with defaults? Most private mortgage lenders just like banks like uneventful borrowers. To discourage problems many lenders will have financial penalties in event of defaults as it takes time to remedy these problems...be careful these fees can be steep.
- Is there a cost of borrowing disclosure document? In many jurisdictions there is a cost of borrowing statement that needs to accompany the loan....meaning the lender need to provide full disclosure on the costs of borrowing.
- Are you allowed to seek independent legal advise? If no...run away!
- Is there a title transfer required? If yes, how are you protected? Seek legal opinion on this one.
- Are the execution of the documents signed at your lawyer's office? They should be.
This not meant to be an exhaustive list but they in my opinion are the main points you need to consider if you decide to borrow from a private mortgage lender.
The main point you need to consider is the worst case scenario...what happens if you default? And from this standpoint, private mortgage lenders are no different than banks or credit unions...they want to get their money back. Which means you could lose your house. And in many cases, you may lose your house a lot sooner than you would with a bank or credit union.
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