Two ways to borrow, two completely different experiences
Understanding the difference between private mortgages and traditional bank mortgages can help you make the best decision for financing a new home. Each option provides the money to secure real estate, but they're structured and processed very differently. In general, private lenders are more flexible and responsive, though they may charge a higher interest rate for the loan. This guide gives you the information you need to choose the right mortgage type for your situation.
What a bank lender actually is
Banks take money from depositors and pay them a low interest rate. They turn a profit by lending that money to borrowers at higher rates. Federally chartered banks can also borrow money from the government at lower interest rates, then lend it out at higher rates to make an even greater profit.
What a private lender actually is
Private lenders typically manage funds from investors, banks, or both. They lend the money out to individuals or businesses who need it. Investors who give money to private lenders expect to make a decent return on their investment. So private lenders may charge slightly higher rates than banks. On the other hand, it's often easier to get a loan from a private lender — they may have lower criteria than banks and other financial institutions.
How they compare in practice
Many borrowers find banks harder to deal with than private lenders. Because they're subject to federal and provincial regulations, banks have more rules and requirements. Mortgage brokers who work with banks must be familiar with numerous programs that can vary depending on location. In turn, each of these programs has its own rules about who it can lend to and the criteria needed to qualify.
Private lenders also have to conform to federal and provincial laws, but they're more flexible and offer more options to home buyers. As a result, private lenders may approve more loans than traditional banks do. Private mortgage brokers can customize the criteria used to approve your mortgage loan — things like debt to income, loan to value ratio (how much you're borrowing compared to the home's worth), and credit scores.
Banks often rely on computers to make decisions based on your financial history and income sources. They don't handle unusual circumstances very well. For instance, self-employed borrowers often have a hard time qualifying for bank loans because they don't have wage and tax statements from traditional employers. Private lenders often dig deeper when investigating who should qualify for a loan and are more likely to overlook certain flaws following a valid explanation.
When a private mortgage makes sense for you
Private lending benefits home buyers in the following situations:
- Unconventional property loan
- Time-sensitive situations
- Unable to secure a bank mortgage
- Poor credit
- Self-employed, unable to verify income
- Lack of credit history
Why borrowers choose private lenders
More lenient guidelines and restrictions are just one reason borrowers choose private mortgages. Other reasons include:
Easier to qualify: Private lenders create their own rules so they can ask for smaller down payments or accept applications with lower credit ratings. This might be a good option if you're interested in buying an investment property or flipping homes, for example.
Shorter approval process: Because of the easier criteria, you get to the closing table more quickly with fewer hurdles to jump, including appraisals and inspections.
Flexibility: You can negotiate your terms, such as flexible repayment plans.
Which route fits your situation
A private mortgage broker provides financing from investors or other unconventional funding sources. This makes private mortgages attractive for those who don't do well when seeking traditional bank loans. While it's important to consider the pros and cons of each type of mortgage, private mortgages offer far more flexibility for borrowers who want to negotiate their terms without strict rules and regulations to be concerned with.
If you're not sure which path makes sense — or if your situation feels like it might fall between the cracks — talk to a broker who works with both. You deserve a mortgage that actually fits how you earn, how you live, and what you're trying to do.
