Private Lenders – What mortgage criteria are they looking for?
In Canada, if you need a mortgage for rush closing or your application was non-ordinary and not approved by conventional financing, you might want to consider private lending.
Private lenders are able to overlook income verification or credit history. When private lenders review applications, they mainly focus on the property itself rather than the borrower since the main security is the real estate property.
To understand and assess your home’s overall value, a private lender will review carefully a recent appraisal of your property. Most lenders have their own approved appraiser list as they worked with them before and trust the value they provided. The appraisal usually uses a direct comparison approach which compares your home to recently sold similar properties in the same neighborhood. Sometimes a cost approach is used whereas the cost to acquire land plus cost to build the property is used. When looking at the appraisal, the lenders usually look at 1.) the appraised value, 2.) the location, 3.) the comparables used to determine final appraised value, and 4.) the cash equity put into the property.
Most of the time a private lender would not lend over 75% Loan-to-Value (mortgage amount / appraised value) of the appraised value of your home. For property located outside urban areas or for non-residents, most lenders will only provide 65% LTV. There are two main reasons for maximum 75% LTV and not 100%. First is most lenders would prefer borrowers to have cash equity in the property which reduces the risk of default. Second is in the case of foreclosure, the 25% would cover selling costs including realtor commission, advertising, legal costs, repair costs, and reduction in property value.
Lenders usually ask for personal income documents and source of income declaration to determine how the debt payments are being made. After all, private lenders would still prefer a loan to be paid as agreed then having to foreclose it.