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.