As high interest rates add mounting pressure on borrowers and make it more difficult to qualify for financing from banks and other traditional lenders, home buyers are in search of alternative options. Interest in private mortgages has grown significantly in recent years, and as a result of current economic conditions, this trend is expected to continue. With home buyers and owners alike reaching out to their mortgage brokers for guidance, it’s important to fully understand whether a private mortgage can help your clients, and how to structure a private deal to give them the best chance at success.
Circumstances of Canadian borrowers have changed significantly in recent years due to several factors – the COVID-19 pandemic and mass layoffs in the tech industry chief among them. With the growth of the gig economy and self-employment, the pool of borrowers that can’t qualify for traditional financing continues to trend upwards. While banks focus heavily on income and credit and require a great deal of documentation, CMI has the ability to look at the bigger picture and customize flexible solutions depending on client needs.
As more of your clients struggle to qualify for a traditional mortgage, building a robust relationship with a trusted private lender, like CMI, will be a significant advantage through 2023. A simple way to help forge this relationship and give your clients their best shot at getting approved for the financing they need is to build a strong, well-rounded borrower profile. Together with a properly structured deal submission, CMI can approve financing in a matter of hours, compared to the banks that could take several days or even weeks.
Before you submit a mortgage application, there are key questions you must ask up front to ensure that underwriters have a clear understanding of the borrower’s financial history and current position to reduce the risk of a deal being declined – or falling through at the last minute.
Here are some topics you should make sure to cover when structuring a deal before submitting to your private mortgage lender.
What’s your money story?
It’s important to get a vivid picture of your client’s financial history (including their current income and credit) and their relationship with money (including spending and saving habits). Even though these questions may be tough to ask, it’s key to get all the information up front to prevent any issues later in the mortgage process.
One of the first things you want to understand about a potential borrower is the state of their credit. For example, if your client has a weak Beacon score, it’s important to understand how this happened to help come up with a plan for improvement. It’s also essential to include whether they have any debts in collections and provide supporting documentation on updated payments.
Get the details on your client’s current job situation, including how long they’ve held their current position, whether it’s full-time or part-time, and the particulars around their compensation. Gather supporting documentation, such as recent paystubs, T4s and an up-to-date Notice of Assessment. If your client is retired or self-employed, ensure that you can supply underwriters with accurate information on their income structure. If your client has filed for bankruptcy or a consumer proposal, you should know whether a mortgage was involved, and the status of any monthly payments.
Questions to ask your clients about their financial story:
- What’s your current job status and how long have you been with your current employer?
- How are you compensated? Are you salaried? Is there a commission/bonus component?
- Do you have any side hustles or are you considering self-employment?
- Tell me about your current credit rating and what led to it.
- Have you filed for bankruptcy or a consumer proposal? Do you owe the CRA?
What does your future look like?
While a private mortgage can be a vital alternative for borrowers unable to qualify for bank financing, it’s intended to be a short-term solution to address current issues and forge the path for borrowers to attain traditional financing at the end of the term. However, today’s borrowers are struggling to qualify with banks when their private mortgage matures as intended, due to higher interest rates and declining home values. That’s why it’s essential to stress the significance of a robust exit strategy.
In cases where a client has damaged credit, determine whether your client is ready to commit to lifestyle changes needed to improve their credit score. This is also a great educational opportunity to teach clients about their credit rating and showcase your expertise by creating a plan to rewrite their credit story.
Ask about their “Plan B.” Consider all the factors that could prevent your client from transferring their private mortgage to a prime lender within 12 to 18 months, and potential solutions. Remember that underwriters will prioritize deals that have well-thought-out exit strategies. Right from the time a deal is being structured, an exit strategy should be in place, and it should be detailed in the notes that accompany any deal submission.
Questions to ask your clients about their plans for a better financial future:
- Do you understand the factors that affect your credit rating?
- Are you ready to take the necessary steps to work on your credit?
- What is your plan at the end of the term? Have you considered any challenges that could affect your exit strategy?
- Are you planning on selling your property? When?
- How can we work together to ensure you’re able to move out of your private lending situation when your mortgage reaches maturity?
What’s ‘the good, the bad and the ugly’ on the property?
There are several property-related factors (such as its purpose, age, and location) that can impact your client’s ability to qualify for a mortgage. Ensure that you have all the information you need from the get-go on the purpose of the property (family home or investment property?), where the down payment is coming from (if it’s a new purchase), and details on other properties the borrower may already own. Gather any supporting documentation needed, such as bank statements or recent mortgage statements, and confirm that your client is aware of all the additional costs that they may be subject to.
Questions to ask your clients about the property they want to purchase or refinance:
- What is the purpose of this property? Do you live there (or intend to) or is this an investment property?
- If the property is a rental, is there an existing tenant? What is the projected or actual rental income?
- If this is a new purchase, what is the source of the down payment? Have you set aside sufficient funds to cover fees and closing costs?
- Have you completed an appraisal?
- If this is a refinance, are you in good standing on other mortgages and/or property taxes? Is there an outstanding balance on another mortgage?
For many borrowers, a private mortgage is their last chance at getting the financing they need, and we understand there’s a lot at stake. However, it’s important to remind clients that open dialogue and complete transparency is necessary. With the right questions, you can ensure you’re providing your private lender with all the information needed to help your clients achieve their goals, without risking a collapsed deal.
Remember, CMI wants to understand your client’s story to create a solution that can work — but this will only be successful with full disclosure around potential issues such as an inability to prove income, credit issues, title issues, and/or arrears. Our goal is to provide the optimal solution for your client’s needs and set them up for future success.
Not all private lenders are equal. Experience the CMI Difference and see why we’re the preferred partner of brokers across Canada. Submit your deal today.