Most people would think in terms of the latter where a private mortgage is your only option to refinance an existing mortgage.
This could certainly be the place where you have bad credit and want to leverage additional capital but do not have the credit profile to qualify at a bank. Another bad credit scenario is when the existing mortgage lender is not prepared to renew your existing mortgage for whatever reason and your credit is not strong enough to secure bank or institutional mortgage financing.
In situations of foreclosure where there is sufficient equity in the property, a private mortgage can be used to stop the foreclosure action by paying out the existing mortgage holder or holders.
So, yes, these are some of the more common scenarios for refinancing with private money.
But there is also a preferred side to private mortgage refinancing as well.
Here are a few examples.
Let’s say that you have a mortgage on a commercial property and the term is coming due. You have never missed a payment, the loan to value is strong, your credit is good, but for whatever reason the lender decides not to renew their mortgage.
Even if this notice is received some time in advance, you still getting tight on time to find a low cost alternative before the payout date. And the reality of securing a commercial mortgage from a bank or institutional lender is that it can take a considerable amount of time to complete.
So instead of perhaps taking an inferior long term refinancing option, you instead choose to go private for one year with repayment being fully open. This allows you to pay out the mortgage that is now due and provide time to get the proper replacement mortgage arranged and funded. The long term cost/benefit could be substantial depending on the size of the mortgage so the added short term cost of a bridge mortgage can potentially be more than offset by a better financing arrangement over a longer period of time.
Another example could be the expansion of the rental or investment property. Say that you require more capital to do the expansion but your current lender is not interested in providing additional capital until the units you are looking to improve or create are completed and generating revenue.
Private funding is more flexible when it comes to looking at debt servicing and even though the cost of financing is likely going to be higher than bank rates, the monthly debt servicing is interest only for the most part, so cash flow burden to service debt will be about the same as a lower cost mortgage that has principal repayment every month.
When the work is completed and the property has minimal vacancy you will then be able to go to a lower cost source of mortgage financing to refinance again, but this time back into a lower interest rate option.
So private funds can be used to refinance both out of necessity and choice.
Mortgage refinancing is always about the net cost to you over time, so it may well be in your best interest at times to refinance through a private lender provided that the math works out in your favor.
But while private lenders will consider bad credit applications, it also doesn’t mean that they have no interest in your credit either.
Bad credit typically refers to a low credit score which can be due to a combination of things such as late payments, debt write offs, judgements, excessive inquires, consumer proposals, and even bankruptcies.
When a person’s credit score drops below a level that will allow them to be approved at a bank, then a private mortgage can be the next best option.
The private lender once again will consider an application with low credit, but will be interested in the what’s going on with your credit profile at the time of application. For instance, if you have had problems in the past with your credit that has impacted your score, but now you are up to date on everything, then a private lender would likely be very interested in your application.
With respect to mortgage refinancing with bad credit, the borrower may or may not have a choice in getting a new mortgage to pay out an existing loan.
For instance, the current mortgage lender may not be prepared to renew an expired term in which case the borrower needs to seek out a new mortgage and due to having bad credit, a private lender may be able to assist.
In other circumstances where additional capital is required for some reason, a borrower with bad credit can consider a mortgage refinancing to secure a higher loan to value mortgage, or perhaps secure a private second mortgage in order to continue to take advantage of the interest rate that is being charged on the first mortgage versus paying it out with a higher cost mortgage.
A Private mortgage is typically for a period of one year which will provide you with some time to improve your credit profile to a level sufficient for a lower rate, longer term bank or institutional mortgage.
While the rate will likely be higher with a private mortgage, the monthly cash flow requirement can actually become reduced, even in situations where mortgage refinancing results in a larger mortgage amount outstanding. This is due to interest only payments typically being required by private lenders. With no principal repayment required during the loan term, the monthly payment can become lower, which may provide some cash flow relief as well.
As mentioned earlier, if you have a low credit score, but are up to date on all your debts, there is likely going to be some solid interest from private lenders to finance your needs.
And more severe degrees of bad credit can also potential be mortgage financed, but the rates and terms are going to be in keeping with the risk to the lender.
If you are in need of bad credit mortgage refinancing solution, I suggest that you give me a call so we can go through your situation and discuss potential private mortgage options that may be available to you.