It’s not for everyone, writes Anson Martin of Verico Fair Mortgage Solutions, but private financing can get the financing your client needs if the broker is willing to work for it.
Since getting into the mortgage brokering business I’ve been heavily involved on the private lending side. I’ve seen the worst of the worst and it’s a very different scene from your typical “AAA” client. While rule changes in the mortgage world over the past few years − from the B-20 guidelines to the latest news from CMHC only a few months ago − have certainly made it more of a struggle for some to obtain an approval, many of these types of clients would not have been approved by an “A” lender even before the revisions to lending policies, and are in need of a viable option.
Putting together a private deal is not for everyone. Many brokers prefer to concentrate on “A” work and that’s fine, everyone has their own type of business they focus on. Personally, I like the challenge these situations present and more often than not, a client is far more appreciative of you helping them out in a bind and become clients for life, not to mention telling all their friends about how you helped them when their bank wouldn’t. Still, it takes a lot of work to figure out how to place these deals and having the right connections with lenders who will actually finance them. After all, not every client has a home in the GTA with lots of equity.
Often times a broker can turn to a “B” lender when there are certain issues such as someone in a credit rebuilding phase or a self-employed client who is unable to verify income through traditional means. While in some cases a solution can be found, it’s certainly not a catch-all for bank declines. Even some of these types of lenders have tightened up and aren’t quite as flexible as they once were. Depending on factors such as location and the extent of the credit issues they may scale back on the LTV, leaving a shortfall the client is unable to cover.
When a client approaches me for help with mortgage financing and has already been declined by their bank, my approach has always been looking at the situation in three ways:
First, is there any product offered by an “A” lender that fits their situation, perhaps by adding a co-signer or some other way of restructuring it to make it more appealing to the lender or insurer.
Second, if it cannot work as an “A” deal, it may work as an “Alt-A” deal. A few lenders have alternative lending divisions which are still more competitive than a full on “B” lender. Although not quite as flexible, sometimes it can work this way, resulting in the client still getting a decent rate all things considered. Failing this, it may end up being a “B” type deal.
Third, if there are no other options, it will have to be a private deal. Even then I try to split it between a “B” lender holding a first mortgage followed by a private second mortgage as this usually ends up being cheaper for the client vs. an entire private mortgage.
A critical step is to have the right lenders to work with. Part of that is knowing when a Mortgage Investment Company can be helpful and when you need a true private lender. There are a growing number of MIC’s across Canada that cater to clients in difficult situations, but most will cap financing at 75 per cent and are property location focused. While that may work in some cases, there are always situations where you need another option and that’s when an individual private lender becomes invaluable. There are a few private lenders that deal exclusively with my brokerage due to the amount of business we send them. However, I make it a point to network and actively search out new lenders. While many don’t work out, some do and it’s important to have relationships with those various lending sources because just like with a bank, not all see it the same way and some have more of an appetite for risk than others. While we do our best to see the full picture, perform our due diligence and work out an exit strategy, at the end of the day the lender knows the risks involved and makes their own decision to lend or not.
Cost is a big factor of private lending as it’s far more expensive than a bank mortgage, both in terms of the interest rate and the setup costs. As a result, communication with the client has to be paramount so they know what to expect. Many clients in these situations have been through a rough patch in life and the last thing they need is a broker who doesn’t explain things clearly which leaves room for more unwelcome surprises.
Getting the mortgage funded is just the first step. A client needs to be guided back to becoming an “A” client, which for some will take longer than others. Many do not understand the importance of rebuilding credit, especially if they’ve just come out of a bankruptcy or proposal and it’s up to you to help them understand not only why they need to get back on track but how. Neither the client nor the lender wants to renew a private mortgage year after year; the client wants to be paying a lower rate and the lender wants their funds back to reinvest in another deal. Private mortgages should always be viewed as short term solutions to allow time to address the reasons causing the client to need private funds in the first place.
Private lending makes up an important part of the overall mortgage financing pie. Not every client needs it, but there will always be those who do. It’s in those tough situations where a client needs a true mortgage professional helping them through it. If arranging a private mortgage isn’t something you do on a regular basis, consider partnering with someone who does. Together you can help the client, which is what it’s all about.