You want to avoid some common mistakes when applying for a second mortgage in Ontario through a private lender. You can use the money for a variety of different purposes, including debt consolidation, renovations, or an emergency. Understanding some of the common mistakes that you want to avoid can make the process go smoothly.
Mortgage Broker Store can help you because it is a transparent private lender and mortgage brokerage. Borrowers can get a second private mortgage from them even if they have a bad credit score.
Understanding Second Mortgages
The definition of a second mortgage is simple: it's a loan taken out on a property that already has a first or primary mortgage. It's a financial product that allows homeowners to access their equity for a variety of reasons, including emergency repairs and home renovations.
The money can also be used for expenses like someone's education, unexpected medical bills, or debt consolidation. A private second mortgage provides a streamlined application process based on equity rather than other requirements like strict income verification and a good credit score. Remember, equity is defined as the difference between a home's appraised market value and any outstanding debts or mortgages on it.
A little due diligence will give you all the correct information to make a good decision.
Common Mistakes When Applying for a Second Mortgage
The more knowledge you have, the less likely you'll be to make some common mistakes like the following:
- Not understanding what all the terms mean, whether you're looking at a private second mortgage or one from a traditional bank, can be costly. For example, private lenders take on an increased risk because they often deal with people with bad credit. That means you'll wind up paying a higher interest rate on the negative side but enjoying a more streamlined process as a positive. Still, it's essential to read the fine print to understand that many private lenders charge between 8% and 12% on these loans.
- Another common mistake when applying for a second mortgage is not reading the fine print to factor in the additional fees and costs. Private lenders need to recoup the money from appraisals and legal costs associated with these loans. Quite often, a lender fee is added on. The combined fees for one of these private loans can vary from 4 to 8% of the total loan amount.
Finally, one of the other big mistakes is not having an exit strategy for one of these private second mortgages. It's essential to remember that they incorporate interest-only payments for one year. A private loan like this isn't designed to be a permanent solution. Quite often, they are a bridge back to a more traditional loan and a chance to repair some financial issues.
The Role of Private and Alternative Lenders in Ontario
Private lenders offer several advantages over traditional banks when you’re looking for a second mortgage in Ontario.
Bad Credit? No Problem.
These lenders will accept applications from people who have been rejected by traditional institutions because they have bad credit. Equifax reports that a good credit score is considered to be between 660 and 724. On the other hand, a bad credit score is anywhere from 300 to 599.
These lenders have a niche to fill that includes bad credit loans. They focus on equity rather than strict income verification or credit numbers. That means borrowers who need money quickly for home repairs and emergency expenses can get a private second mortgage quickly.
Others can benefit from these private loans.
- Self-employed people can have fluctuating seasonal incomes. Because the requirements for a private second loan are more flexible, these people can get the money to support their cash flows in down times.
- Real estate investors can jump on a good deal that won't last long with the money they get from a private second in mortgage.
- Entrepreneurs who renovate and quickly resell properties can get a customized loan to jump at a deal fast.
Even people with a high debt-to-income ratio can find success with a private lender. Banks use this ratio to determine who's eligible for a loan. It compares the monthly debt payment of an applicant to their gross monthly income.
Private lenders work around the more strict requirements of a bank or credit union. They have a more streamlined process that includes a different metric.
Evaluating Your Home’s Equity and Loan-to-Value Ratio
The biggest metric that a private lender uses is the loan-to-value (LTV) ratio. It is the percentage of the home's value owed in mortgages. Equity is the amount of the property owned by the owner. Generally, the lower the LTV, the higher the equity.
It's important to get a proper appraisal to determine the current market value of your house. The higher the appraised value, the more equity.
The LTV formula looks like this.
LTV = Total Loan Amounts / Appraised Value of the Property.
Suppose a home has an appraised market value of $1,000,000. In this situation, the borrower is requesting a $250,000 second mortgage and already has a $500,000 first mortgage. The LTV for the mortgage they are requesting can be up to 75% of the property’s value. The loan amount is the amount of the new loan plus the old loan divided by this appraised value.
Navigating Legal and Financial Risks
Understanding the financial and legal risks of one of these private loans is essential.
- If you breach the mortgage contract, there's a chance of a power of sale or foreclosure. Usually, that's after a borrower misses several payments or breaches a covenant. This can mean using the property for illegal purposes, not paying taxes, or damaging the property on purpose.
- Having an exit strategy for one of these private loans is essential. A private second mortgage is usually for a one-year term, with interest payments only. They can act as a good bridge to help someone having financial difficulties get back in better shape. However, it's essential to have a path back to a more traditional loan.
Tips for Choosing the Right Mortgage Broker in Ontario
Choosing the right private mortgage broker means practicing due diligence to avoid some of the issues we've brought up in this blog.
Check Out The Fees
Remember to check out the fee structure. Although these will be higher than with a more traditional loan, they should be within the ballpark of what we highlighted earlier in this article.
Look for Good Customer Service Options
Private lenders will be able to clearly explain interest rates, repayment schedules and the terms of a private second mortgage. You should expect to have more of a one-on-one relationship with these lenders. Banks and credit unions have more administration to sort through and less personal contact.
If you want to avoid common pitfalls when you're looking at getting a private second mortgage, Jonathan Alphonso is a real estate expert who can help. He's also a private lender who maintains several websites like mortgagebrokerstore.com and powerofsalesontario.ca. You can get in touch with him by email at ron@powerofsalesontario.ca. Phone Jonathan at 416-499-2122
