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Tuesday, October 22, 2013

Private Mortgages - Are They Good Investments To Make Me Money?

  With interest on bank saving accounts yielding little return many folks hear others talking about how they are getting high returns from investing their money in private mortgages. You look at your saving accounts and returns and begin to wonder - is this something I should look at?
  You wonder why would a person not go to a bank for their mortgage? Sometimes good people who have worked to keep their credit in good standing run into problems:
  - a person loses their job and needs the mortgage while they are between jobs
  - a person has a recent bankruptcy, consumer propsal or collections and regular lenders will not look at 
    them for at least 2 years

  - a mortgage is up for renewal and they do not qualify for another one because the debt level is too high
    compare to the total income
 - perhaps a divorce or separation has occured

 - a person was forced to find another job but at a lower salary

 - a lender has called the mortgage in and is foreclosing on a property and the person wants to save it

     As you can see many reasons exist why a person might turn to a private lender. This is where a private
  lender steps in to fill this niche for a determined period of time.

  There are 2 types of private lenders - an individual and a MIC group (mortgage investment corporation). As an individual you would be given all necessary information and in consultation with your mortgage agent who has brought an application to you and perhaps your lawyer or accountant  you make the final decision on whether to fund the deal or not. 

   With a MIC you give money to them to manage. Your investment will be pooled with other money and a board will decide whether to fund an application or not. Your investment will be secured by real estate. You will have to ask about any management fees.
   As a private investor you are not looking at traditional lender criteria such as numbers, good credit but looking at thew individual and their ability to repay, their total debts and with an appraisal in hand the equity that is in the property. You would invest in properties that you feel will be a safe investment. This could be residential only, or perhaps a rental unit, vacant land, cottage or a commercial property.

  Rates will vary depending on the risk involved. A first mortgage might be 7 - 10% while a second or third mortgage will be 10% plus.
  Terms are usually for 1 year and generally interest only. However terms could range up to 3 years.
   Approval could be in a day or two or longer depending how long it takes for all the documentation to be completed. 

 As a private lender you may choose to charge an acceptance fee if you are prepared to go ahead with approving an application. The applicant will pay all your legal fees and also pay a fee to the mortgage agent who brings you the application.

  There is one important thing to remember. If you accept the applicant and down the road the person stops payments you may be forced to put the property up sale under a power of sale. Generally a real estate firm is hired to sell the property. After a sale you may or may not get your investment back. If there are any property taxes owing, these are paid first and then all realtor and legal fees. The holder of the first mortgage is now paid followed by the second and then, if any, the third mortgage holders. Before agreeing to fund a mortgage you have to look at the equity that will be available after a mortgage is granted.


Thursday, October 10, 2013

Understanding and Keeping Your Credit Score Healthy

One of the least understood financial tools that a consumer has that affects their ability to borrow and at what rate is the credit score commonly known as the beacon score. This is a number that is assigned to you based on various criteria that a lender looks at to see if you are an applicant that they consider being financially able and credit worthy to repay a loan or mortgage.

In Canada there are 2 credit rating bureaus – Equifax or Transunion. Each has their own scoring system and they may or may not contain the same financial information. Equifax has a number system from 300 to 900. A number above 700 is considered good while a number in the 300-400 range is very poor. Prime mortgage lenders look for a number from 620 to 650 to consider a candidate. There are alternate or “B” lenders that will go as low as 500 and private lenders do not look at the credit score.

The  credit score is made of 5 different components:

a)     Payment history          35%

b)    Debt amount               30%

c)     Credit history               15%

d)    New credit accounts   10%

e)     Types of credit              10%

As a consumer you must give your written consent first before an inquiry can be made. ie: mortgage application, credit card application.

You can receive a free report from either agency so that you can check it for accuracy and any misinformation. You will not receive the actual number unless you pay to receive it.

Your credit score can be negatively affected by too many inquiries in a relatively short period of time ie: you apply for 3 different credit cards in a short period of time. Each application will count as a “hard hit” and each hit can lower your score by 7 points.

An exception is the agencies realize that if you are shopping for a new mortgage or car several inquires may be made. As long as they are made in a short time period – 2 or 3 weeks- they will only count as 1 hit.

If you ask for your report or an insurance company does this will be considered a “soft hit” and will not affect your score.

If a person runs into financial problems and an account goes to a collection agency this will stay on your report for 7 years. As long as you start to show that you are re-establishing credit and making your payments on time, there are lenders that will grant you a mortgage but at a higher rate. Generally they look for 2 years of good re-established credit.

If your credit score has taken a hit you can bring it back up over a period of time. Some of the suggested ways include:

a)     Pay your bills on time so that your payment is received before the due date.

b)    Reduce your total debt. It is suggested that you try to keep your debt level at 30-40% of your total credit ceiling. This is called your debt utilization level. Try to pay down those loans that have the highest interest rate first.

c)     Try to build a credit history. Most lenders look for 2 trade lines ie: major credit cards and/or lines of credit.

d)    If you have an old credit card with no balance and you are not using it your first impulse might be to cancel it. However the length of time you have a card affects your score and cancelling it could have a negative effect along with affecting your utilization level. An example. You have one credit card with a $2000 limit and owe $1000. You have another card with no balance and a limit of $3000. You owe $1000 with a total limit of $5000 and you are using 20% of your limit. If you cancel the one with a $3000 limit you now owe $1000 with a limit of $2000 so you are now using 50% of your available credit. This would signal a red flag to a flag.


In summary, use any credit cards or lines of credit wisely and keep your credit rating healthy.



Monday, October 7, 2013

Why Is the Lender Asking For An Appraisal As A Condition For My Mortgage Approval?

Sometimes a mortgage agent runs across a situation where the client is questioning why the lender has imposed a certain condition ie property appraisal. The client may say that their neighbor or relative or friend just got a mortgage and they did not have to pay for an appraisal on the property.

 If a client qualifies, some lenders will use what is called an APV or Automated Property Valuation. This saves the cost of an appraisal along with moving the mortgage application approval process along much faster.

However, some types of applications and properties will continue to require a full appraisal, such as but not limited to:

- properties with values greater than $750,000

- mortgage amounts greater than $600,000
- construction draw financing (progress advance)
- rental properties

- all New Immigrant and BFS  (Business For Self) applications

- restricted properties

- recreational properties

- unique properties including Leasehold Tenure

- the property has more than 1 unit (multiple units)

- leasehold mortgages

- conventional Mobile, Modular or Floating Homes on owned or leased land

- purchases with no MLS
- private sales
- power of sale

- rural / non-urban properties where the 2nd digit of the postal code is ‘0’ (e.g. P0P)

For many reasons an appraisal may be required as a condition to approving your mortgage application.