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Archive for the ‘Private Lending’ Category

Vendor Take Back Mortgages – Take Back – 2nd Mortgages

Saturday, September 11th, 2010

Transcript of Video Blog:

Hi, everyone. I want to talk today about something — I haven’t done a blog post for quite a while — and that’s vendor take-back mortgages. What is a vendor take-back, and when does it apply?

A vendor take-back is essentially a situation when the vendor agrees to take back a mortgage in lieu of some cash. I’m going to give you a really clear basic example, but then I’m going to show you what everybody always wants and why it rarely works in Canada. It works in the United States quite smashingly, but it doesn’t work so great up here north of the border.

So, a vendor take-back: if you assumed that a guy wanted to buy a piece of property that was $400,000 but he didn’t really have a down payment, what he could do is go to that vendor and say, “Listen, what I’m going to do is I’m going to get $20,000 from someone over here. Will you carry the balance of the mortgage?” meaning, will you loan me the money and take the property as security?

Now not all sellers are going to be willing to do this. First off, they’re going to want an interest rate, probably higher than the bank’s, to make this worth their time. Secondly, they have to not need those dollars to go buy something else because they haven’t received them from you. You borrowed it from them.

That’s a standard vendor take-back situation. I’m dealing with a guy out in the country right now who bought a house with a massive shop on a huge piece of acreage. The banks didn’t want to finance it because the house is old and rundown, and he was buying it purely for an 8,000 or 10,000 square foot shop that was on it that was wired up for his business. For him, it made great sense.

The vendor was an old guy. The vendor agreed to lend him 100% of the purchase price. Great, he can do whatever he wants, but he’s got to pay that guy the interest. Eventually, as he accumulates money from running his business, he’s going to have to get a mortgage from somewhere to pay that guy out, because that guy’s going to eventually want the dollars.

But here’s the situation we run into frequently where people think a vendor take-back would work. They know they need to get 20% to buy a rental property, so what they say is, “Well, why don’t I put 10% that I have down, and then the vendor gives me 10%, and then we get the other 80% from the bank?”

The reality is that banks generally don’t go for this setup. They don’t want to see vendor take-backs, because if they do, they now have to factor in that payment and can the person afford the vendor take-back payment, the mortgage payment, plus any other debt payments.

If they can, great. Then there might be something we can do. But in the 10 years that I’ve been doing mortgages and banking, I’ve never seen that situation once. So you generally need 20% of your own equity before a vendor take-back becomes an option.

Now you say, “Look, I’ve got 20%. What do I need the vendor take-back for?” Still, 80% is still a pretty high amount of financing, and if your property’s unique or your situation’s difficult with credit or income, maybe you’re going to need 35%. So you’ve got 20; you need 35. Where’s the 15 come from?

That’s a circumstance where a vendor take-back might make sense, and it may be a situation where we can use it. But I need to look at the situation as a whole, because the property, the source of your down payment, and your income and credit all form a very integral piece of the puzzle, and we’ve got to look at that together.

From the Mortgage Centre, I’m Rowan Smith.

Private Mortgages / 2nd Mortgages – What is Private Money

Thursday, September 9th, 2010

Transcription of Video Blog:

Hi, everyone. It’s Rowan Smith from The Mortgage Centre. I’m here today to talk about private mortgages, private money. What is it, when do you want to use them?

Well, private mortgages are really just that. It’s a mortgage funding and financing that is set up by a private individual or a corporation. Now, these are not financial institutions. This could be somebody who is just very wealthy and is looking to lend a friend or family member money, or it could be someone who just has a bunch of funds sitting around and wants to earn a return that is greater than they can earn at the bank.

So, with a private mortgage like that, the borrower would usually have to go through the broker or they have to know the lender directly and approach them and get the mortgage set up. Now, why would you do this? You’re going to face higher rates than the bank; you’re going to face fees for sure, so why do borrowers do it?

In most cases it’s because they can’t qualify under traditional guidelines. Maybe they’re in the midst of a divorce. Maybe they’re in the middle of a career change. Maybe they’re currently unemployed and just need to use some of that equity that they’ve built up in the property, to get them through until their new job starts.

There are a lot of very legitimate reasons why people need private money, and very legitimate reasons why the banks won’t give them the loans under the circumstances. If you’re in one of these situations, private mortgages might be the way to go.

I have a lot of private lenders ranging from very wealthy people to very large mortgage investment corporations, that can look at your situation and will make more sense, than perhaps your bank who is looking to have you fit within the bank box.

So, if you know somebody who is in a tough situation and needs access to funds, I can help them.

From The Mortgage Centre, it’s Rowan Smith.

Private Lender Fees Too High? Talk to me!

Thursday, July 8th, 2010

Transcript of Video:

Hi everybody. It’s Rowan Smith with The Mortgage Centre. I heard something today that made me angry enough I had to come and do a blog post on it, and it has to do with lender fees.

Many times when we’re doing a mortgage for residential purchase or refinance or something like that, there are no fees. Most times, I would say most transactions there are never broker fees.

The only time that broker fees apply tends to be when either there’s an extraordinary amount of work that has to go into it-far and above what would be normally asked. I’ve never levied that in my career. Alternatively, it can be when you’re doing some private lending. The reason is private lenders do not pay the brokers.

Now, what’s making me upset was that we’ve sort of gone back to the old days of cowboy financing. What I typically will see in a private mortgage if someone doesn’t qualify under bank guidelines but they’d still like to raise some financing, they’d get a first mortgage. Maybe they have a big down payment. It’s called 25 percent.

They go to a lender. They get a rate of… I’m just grabbing numbers here. Nine percent, let’s say, and they were going to pay a three percent fee. Well, that fee typically will be divided up between the lender and the broker. So the broker would be getting some of the three percent, and the lender will be getting the balance.

Now, what’s sort of happening is we’ve started to see a trend where brokers are calling the lenders and saying, “Listen, will you charge the client a slightly higher rate and take one percent fee, and I’ll take four?”

Now, on a small mortgage where it’s maybe $50,000, it’s not a tremendous amount of money. But a lot of times these large first mortgages are being done on properties that someone’s going to buy and flip. Maybe they don’t qualify under normal guidelines. But they have good income. Or maybe they’ve got money offshore or what not.

Four percent on some of these mortgages is outrageous. And brokers who are charging these fees shouldn’t be allowed to get away with it. I don’t know how they get their clients. I certainly don’t know how they keep their clients. But I know that I’m out there looking to eat their lunch.

If you know anybody that’s being told they have to pay a five percent fee on their mortgage, and as long as the mortgage is excess of what, $100,000. That becomes a very large chunk of change, a very big piece of money that someone’s making on one transaction. Those transactions are no more difficult than a straightforward bank transaction that they’re doing. In fact, they’re oftentimes less difficult because the broker doesn’t have to document the file the way they would with a bank.

Anybody paying those types of fees please call me. It’s Rowan Smith from The Mortgage Centre.

Private Lending – When It Applies and When it Doesn’t

Wednesday, July 7th, 2010

I have taken a LOT of calls on private lending recently, and I figured it was time to do a new post on the topic and explain when it does and does not apply.

Transcript of Video Blog:

Hey everybody, Rowan Smith from the Mortgage Center.

I want to talk to you about private lending. There’s a lot of confusion as to where it is. People will often say to me, “I tried to get five percent down with my bank, but I couldn’t document my income . So I was wondering if you have any private lenders.” And the answer is, with five percent down, “No.”

Private lending is restricted, generally, on the strength of the property and the size of your down payment. Now, sure, credit and income play a role; they want to make sure you know how to pay your bills and they want to make sure you have income. But they may not seek to verify it in exactly the same fashion that the banks will.

Many times, they won’t look at it at all. They’ll assume that if you’re stoking down 30 percent or 40 percent of the property’s value and if you have payments of $1,500 a month, that you would be a fool to do so if you didn’t have a means of making those payments, that’s equity lending.

And equity lending is really based on the quality of security, it’s proximity to major arterial routes, to urban centers, to schools, et cetera, et cetera, et cetera, predominately focused on resale value. So, if you’re buying a unique property up in the Coot Knees, and you’re trying to get 95 percent financing. If the banks won’t do it, FC and HC won’t do it, you’re not going to get it from a private lender outside of the bank of mom and dad.

Now, in cases where private lending is required, someone with poor credit, maybe their credit is below what the bank’s threshold is. And, maybe they have a large down payment. A classic example of this is someone who’s gone through a bankruptcy, who owns a business and maybe still makes very good money but, due to one reason or another, was forced to declare bankruptcy and they’ve got 30 percent down. And they’re trying to buy a place and they’re being told everywhere, “No way, we can’t due to credit.”

That’s a perfect candidate for private lending and usually they can get some reasonable rates in those circumstances assuming the property is, again, solid and secure because that’s kind of the backbone of private lending.

Another thing, is if the property doesn’t conform to standard uses. For example, a former grow op or former meth lab, or land-only on service lots, and that kind of thing. These are places where banks don’t really like to lend, at least not at the four percent range or five percent range, but that’s still good business and those properties still have value. So, if you’re a borrower looking to get some sort of land loan or a former grow op financing so you can fix it and sell it for a large profit, those are definitely the ones that we can help you.

Lastly, people that just can’t document their income. Maybe they’ve got fantastic credit. They run a small business and they make good money each year, but due to write-offs and tax-efficient accounting, they’re not able to prove their income. And if the banks don’t believe how much income they’re earning, but they have a sizable down payment, again, we might have to go to private lenders. Not always. We often have equity programs at banks and whatnot, if they have enough of a down payment.

But sometimes, there’s that gap between what the banks will do on an equity basis and between what they will do on a stated income or full income basis. And, in that gap, is where private lenders tend to make their money.

Lastly, weird situations. So, banks will often demand independent legal advice for a spouse buying a home without the other spouse on title or maybe you’re trying to do an equity takeout for investment purposes in another property. The numbers don’t quite jive because the banks don’t give you credit for your rental income the way that they used to. These are all perfect examples of places where private lending is required.

A common one is also construction or buy, fix and flip. These are places where you can use a private lender who’s not going to ask you a billion and one questions like the banks are going to ask you. I can make the process a lot easier.

Now, in exchange for all of this freedom, in exchange for all these abilities, you’re going to pay a higher rate. So, if the banks are charging four percent, you’re probably on a first mortgage looking anywhere from 6-1/2 to 12, depending on the risk that you pose as a borrower and that the property poses as security to the lender.

Now, there’s also second mortgages, third and so on and so forth, maybe you don’t want to break your first mortgage because you’ve got a fantastic rate on it, but you need 20 grand to consolidate some credit card debt and get the creditors off your back. These are all ideal things for private lending.

If you have a situation that doesn’t fit the bank, but you’ve got some equity and, generally, you need about 20 percent equity in the property, or 20 percent down for private lending to be considered effective, then please give me a call.

For the Mortgage Center, I’m Rowan Smith.

Private Lenders – What Are they and What do they lend on?

Wednesday, July 15th, 2009

Whenever someone wants a loan the bank won’t do, they call me and ask, “but don’t you have any private lenders?”

Of course I do, but they don’t lend on EVERYTHING.

Let me start by saying that the title of “Private Lender” doesn’t mean “Stupid Lender.” In fact, if anything, they are the shrewdest lenders out there, and are very concerned about safety of their capital.

Generally, private lenders will not lend more than 75% – 80% of a property’s value. If the property is just land, then than gets shaved to 50% – 65%. If the property is very odd, hard to sell, or “unique” then you can bet private lenders won’t touch it.

Why? Because private lenders do loans that are higher risk than the banks. Therefore, the chance of someone defaulting are higher. If they have to go through the legal process, it may be months, or years, before they get their capital back. With costs and interest, they can end up losing money, so they simply won’t lend beyond 80%. They won’t.

So where DO they lend?

They lend to people with poor credit or non-verifiable income, but WITH equity. They want to see roughly 20% – 25% (or more) equity in a property when their loan is taken into account.

So, let’s say you have a $400,000 home in Surrey. You have a $200,000 mortgage and $200,000 equity. You’ve fallen on hard times, and need $40,000 to pay off some credit card debt. However, you’ve missed several payments, and your bank won’t lend you the money. This is an IDEAL situation for a private lender. There is lots of equity (more than 25%) and they’ll give you the $40K without messing up your low rate 1st mortgage with the bank.

That is just one example, but you get the idea. They want EQUITY in the property whether that is a down payment, or existing equity. You won’t be getting 85% or 90% financing from a private lender. It’s just too risky for the lender.

Other situations they’ll lend:
1. Poor credit
2. No credit
3. Non-residents
4. Non-verifiable income
5. Non-traditional income
6. No income
7. Raw land
8. Serviced Land
9. Former grow ops
10. Construction situations

Nowhere on that list do you see “no equity” or “no money down.” You MUST have equity, and a healthy margin of it. The old saying from private lenders is that they want to see that the borrower has “some skin in the deal,” so that if things go sideways, the get hurt as much as the lender does.

Situations they will NOT lend:

1. Unsecured
2. Businesses and restaurants where there is no land or real estate component
3. More than 80% financing is required

Ultimately, private lenders are just people with wealth that are concerned about losing it. Just because you’ve heard we brokers have access to private lenders, doesn’t mean we have access to lenders that will give anyone money for any percentage of the property. Ultimately, you’ll need equity.

It’s just the way it is.

Private Mortgages – When to Use them and Why – Part 2

Thursday, October 30th, 2008

In the previous post I described why private mortgages cost more, why you would use them, and why they are more risky for the lender.

In this post, I will cover some specific situations that private mortgages are ideal as well as the rates and fees you can and should expect on the deal.

Here is the list I provided in the earlier post, and I will now elaborate on it:

1. Prior recent bankruptcy
2. Current divorce, not yet settled
3. Very poor credit
4. Collections and judgments on credit
5. Child support in arrears
6. Unemployed applicant who hasn’t yet found a job
7. Fast turnaround situations requiring funds in as little as one day
8. Properties that the bank doesn’t like to finance (leaseholds or bed and breakfasts homes, for example)
9. Bridge financing when the bank won’t offer the bridge from one home to another
10. Top up financing when the bank will only lend a portion


When applying for a bank mortgage, they usually want to see two years between the time you are discharged and the and the time you apply for a new mortgage. Also, they will want to see 12 months of re-established credit since the discharge. These are bank guidelines for bank mortgages. However, opportunities sometimes come up that you may wish to take advantage of even if you can’t get bank rates on the mortgage. If you haven’t met their guidelines, you will need a private mortgage in order to get the financing.


If you apply for a mortgage, and are married, many lenders will want “spousal consent” to prove that your spouse consents to you buying a new home. They will want this proof in writing, notarized, and it is due to the fact that in most provinces the spouse (even an estranged one) have a right against a home that another spouse purchases. Lenders need to protect themselves from any potential claim, and banks are very nervous about this situation. Private lenders often don’t even ask the question about spouses, and if a divorce isn’t settled, but you find a perfect home, you may need to temporarily get a private mortgage to secure the property.


Banks often have very stringent credit requirements, and oftentimes if a person has a recent divorce, business failure, or job loss, they may have very poor credit. Even if it was only for an isolated period of time, the poor credit repayment will stay on record for at least 6 years. If your credit has challenges, you may need to get a private mortgage for PART of your financing, if not all of it, depending on how bad your credit is.


There are many ways that your credit an be harmed, and if you have a prior cell phone bill, cable bill, or, for example, student loan that has gone to collections, it may have damaged your credit bureau sufficiently that you cannot obtain bank financing. In these cases you will need a private mortgage for some or all of your mortgage.


If you have child support payments that are not being made, your ex can register a claim on your credit bureau so that all future lenders can see it. In this case, the banks will not lend a mortgage to you, and you will therefore need to clear this item up prior to getting a mortgage. If you cannot clear this up, or do not want to because of a dispute as to the amount or validity, then you will need a private mortgage until the matter is cleared up.


There are times when even professionals in rock solid jobs can be laid off due to economic conditions, industry changes, or what have you. Oftentimes people have large savings set aside, and may wish to downsize. However, the banks will insist that you have a job before giving you a mortgage for a new property. If you have been laid off, fired, or quit and suddenly find a dream home, then you will need a private mortgage to close on the property temporarily until you find new employment and can pay out the private mortgage with a bank mortgage.


It generally takes between 7 and 14 days to apply for, get approved, and close on a bank mortgage. Sometimes situations arise that require funding in as little as 1 day. No bank can close in this situation, but a private lender can. If you require funding in a short period of time, whether it is a purchase or refinance, then a private lender is your best friend until you can get a bank mortgage arranged.


There are a number of property types that appear great to a particular client, but which the bank won’t finance. A partial list of these are:

1. Farms
2. Hobby Farms
3. Bed and Breakfasts
4. Homes with a commercial zoning or component
5. Hotels
6. Single Room Occupancy Homes (Rooming houses)
7. Houses with multiple unauthorized suites
8. Gas Stations
9. Properties that were formerly dry cleaners
10. Past Grow Ops (the subject of a future post as they are a huge issue)

This is just a small and partial list, but banks don’t like to finance these properties for a variety of reasons. The essential point is: if you can generate income off the property itself (bed and breakfast) and require that income to qualify for the mortgage, then the bank won’t want to finance it, in most cases, and you may need a private mortgage.


If you have a home, and it sells on, say November 30th, but you find a home that is perfect but you need to close on the purchase before your home closes, then you need bridge financing. This is NOT available in all situations, and it is NOT available at all banks and lenders. Many times, you will need to take equity out of your home that you currently own (often 20% of the new home’s purchase price) temporarily until your old home sells. We often have to arrange private mortgages for a short period of time while you sell your old home. People often blanche when they hear 12% or 14% as the rate, but if it is only for 2 months, then that is only 2% or 2.33% and when you compare that with a purchase of several hundreds of thousands of dollars, that is not a large cost and you need to look at the bigger picture.


There are many situations where a bank will only lend, say 65% or 75% of a purchase price (possibly due to credit, income, or property issues and the client will need another 10% or 15% to complete on the transaction. In these cases you may need a small private 2nd mortgage until you can clear up the other issues.


There are four primary things a lender looks at when doing a mortgage:

- Property
- Income
- Down Payment
- Credit

If you have problems with any ONE of these issues, then you may still qualify for bank financing, but if there are issues with two of the above things, then you likely will need a private mortgage.

The times you will want a private mortgage is when you are short on TIME, short on CREDIT, short on INCOME, or buying a property the banks don’t like.

If you can make a quick $25,000 on a  deal, but it will cost you an extra $300 for two months, but has a sticker price (rate) of 15% would you take it? Of course you would! Look at the bottom line, and think of private financing as a temporary measure and you will often see that the benefits far outweigh the costs.


Private First Mortgages:
Rates usually ranging from 8% to 12%  (depending on credit, property, income and down payment)
Fees usually ranging from 1% to 3% (depending on credit, property, down payment and income)

Private Second Mortgage:
Rates usually ranging from 12% to 18%  (depending on credit, property, income and down payment)
Fees usually ranging from 2% to 8% (depending on credit, property, down payment and income)

Private Third (or more) Mortgages:
Rates can be 15%+ with fees in the 8% range

Are private mortgages expensive? Yes. Do they have very good and compelling reasons to get then? Yes, usually temporary, but often you have no other option.

Private Mortgages – When to Use them and Why – PART 1

Tuesday, October 28th, 2008

“Twelve Percent!” the client screamed into the phone, “that is highway robbery!”

This is a common phrase I hear everytime I quote the rates on a private mortgage. The reality is that no matter what the market is doing, private lenders tend to want around 12% (possibly plus fees).

So why are the rates so high? Who would take those rates? The answers to these questions are important, and they are the subject that we will explore today.

First, why are the rates so high? Well that depends on if it is a first or second mortgage, what percentage of the home’s value is being borrowed, and the client’s credit and situation. These are complicated questions, so this is going to be a two part post. Let’s address each in turn. We’ll start with a few topics today and few more tomorrow.


First mortgages are generally more safe than seconds, and seconds are more safe than thirds, and so on and so forth. The reason is that in the foreclosure process, if a client isn’t paying the first mortgage, the 2nd (or 3rd) mortgage holder may have to pay out the 1st mortgage to preserve their investment. If the foreclosure process is started, the owner generally has 6 months to bring things back up to date or the courts will issue an “Order Absolute” which wipes out all mortgages behind the 1st mortgage and leaves the property in the possession of the 1st mortgage holder. While this is VERY rare, it does happen, and therefore, if a client defaults on his first mortgage, the 2nd mortgage holder (or third) may have to pay out the first mortgage (in cash) so that they move into 1st position and preserve their investment.

Let’s use a concrete example so that this makes sense:

Assume a home is worth $400,000 and the client has a $200,000 1st mortgage with, say, TD Canada Trust. They have accumulated $50,000 of credit card debt, and have started missing payments. Their credit score gets hurt, and as a result, TD will not advance them any additional funds. However, there is a LOT of equity available there ($200,000 worth!). This is a prime situation for a private mortgage where a lender will take a 2nd mortgage, usually at rates of 10% – 14% depending on the risk and property.

Now, if the client doesn’t keep their 1st mortgage up to date, TD may start a foreclosure process which will (in general) give the clients 6 months to bring things back up to date or TD takes the house in lieu of payment. IF this happens, the 2nd mortgage holder loses their money! Their mortgage is wiped out!

To prevent this from happening, the 2nd mortgage holder needs to have enough money on hand to pay out TD (in this situation) so that they take over the 1st position (and thus take over the foreclosure). There is an alternative that the 2nd mortgage holder can pursue called “Conduct of Sale” where they can force the home to be sold through court ordered sale to recover their money – but they have to prove their equity is at risk – and this can be difficult depending on the situation.

So, as you can, the possible responsibility of having to come up with $200,000 cash is a serious risk, plus the hassle factor, that results in private lenders looking to get paid a higher rate of interest (and fees) to do a 2nd mortgage.


As a general rule, you can borrow only 75% of a home’s value by way of a private mortgage. There ARE some lenders that will, in this market, go to 80% or even 85% but you can expect VERY high rates and fees for this as the risk (especially in today’s market) is that the prices will continue to fall and the lender may end up having loaned more than the home is then worth.

The higher the percentage being purchased, the higher the risk, the higher the rate you will pay. I have seen private first mortages as low as 6% when the client is borrowing less than 50% of the home’s value. I have also seen private mortgages of 19.5% when the client was borrowing 85% of the home’s value.

So what is the “value” that the lenders use? They will usually request an appraisal from one of their preferred appraisers who they trust, and who has sufficient experience in an up AND down market to properly peg the value of a property. You should consult the lender or your broker before shelling out cash for an appraisal as many lenders will only accept one or two appraisal firms in town.

Bottom line: the higher percentage you borrow, the harder it is to get financing, and the harsher the terms, rates, and fees.


When you get a bank mortgage, they will do a lot of due diligence to confirm that a client has sufficient income, credit history, and character to repay a loan. Private lender’s don’t care as much about income and credit as they do about equity. They are, generally, more concerned with the amount of equity behind them than with the client’s credit or job. In many cases, they will not even condition for proof of employment! For this reason, private lenders are the lender of choice for people in tough situations such as:

1. Prior recent bankruptcy
2. Current divorce, not yet settled
3. Very poor credit
4. Collections and judgments on credit
5. Child support in arrears
6. Unemployed applicant who hasn’t yet found a job
7. Fast turnaround situations requiring funds in as little as one day
8. Properties that the bank doesn’t like to finance (leaseholds or bed and breakfasts homes, for example)
9. Bridge financing when the bank won’t offer the bridge from one home to another
10. Top up when the bank will only lend, say 65% but the client needs another 10% to close on the purchase

There are many many more reasons, but these are all situations where a private lender may step in.

In the next part of this article I will provide the type of terms you can expect, rates, fees, as well as some elaboration as to specific situations where a private mortgage is highly beneficial and the preferred choice.