A caller just asked me “how long is the loan for?”. As I was explaining it to them – I thought it would make a good blog post.
If we are talking about private money loans – the short answer is “nearly all private loans are for one year, but nearly all private loans can be renewed for more years, if necessary”.
But this really misses the point. The private loan (or mortgage, or charge) is not usually MEANT to be kept for any longer than necessary! One year is often enough! So we set them up for a year, and then renew them if the borrower needs it. Let me explain.
When a caller first contacts me, after the initial preliminaries, I usually start the conversation with “Please tell me what is going on.” I never know for sure what the answer will be to this question …
Most people who call needing a private loan/mortgage have some sort of issue in the background that prevents them from borrowing from a bank. Maybe they have not filed their taxes. Maybe their credit score is awful. Maybe they have unpaid collections or unsatisfied court judgements. CRA may have put a lien on their house, or have a wage garnishment in place. Maybe there is a Family Responsibility Order. They may be behind on mortgage payments, or property taxes. Maybe their income doesn’t show up in typical ways, or is officially “too low” by banking criteria. Sometimes they own a home in a location that banks no longer value. Maybe the bank has started Power of Sale proceedings. Maybe the borrowers are in Consumer Proposal.
So – whatever the reason – a private loan is used when a bank loan is not available. Often for one or more of the reasons listed above. After bank loans are ruled out, then we can try subprime loans. If these too are not available (again – often for one or more of the reasons listed above – the subprime lenders will not lend), THEN we go to private money. You can read more about this by clicking on the “Rates” tab of my website.
Private loans are used to solve problems, to get you out of some kind of bind, or trouble. They cost more than either bank or subprime loans, so we only use them when these other sources will not lend. The reason the private lender can lend when a bank can’t, is that the private lender really isn’t too concerned about most credit issues, nor is the private lender too worried about income either.
What the private lender REALLY is interested in is your property. Your home forms nearly the entire basis for “approval” of the loan. The value, location, condition, well vs municipal water, septic vs city sewer, age – ALL of these, are extremely important to the private lender.
In order to “approve” a loan, a private lender will need an inspection – they will want to see what the house looks like. The electrical panel, roof, windows, floors, any damage, curb appeal, mold – these are all incredibly important.
The reason is obvious – seeing as the private lender is not relying on your credit, nor your income, the only thing they have to fall back on is the property. So the property HAS to be sufficient to provide security for the amount being borrowed. It is the only “safety net” the private lender has.
So why only a one-year term? Because once the private loan solves the immediate problem (poor credit, spotty income, liens, taxes, etc) – and the client’s finances normalize – the house should be refinanced, the private loan added to the existing mortgage, and the private loan is paid off in this process.
Most situations require one year to resolve. Nearly ALL are resolved within 2 years. During this year or two, the issues on the credit bureau can be dealt with. Any outstanding judgements or liens are paid from the private loan. High credit card balances can be paid by the private loan. Mortgage or property tax arrears, liens, etc – all are paid by the private loan.
With the cards judgements/liens/tax arrears/mortgage arrears/ etc all paid off, the credit improves. With all of these things consolidated, the cash flow is better. So the financial bind that caused the caller to contact me in the first place – has passed.
So the private loan is only required for a year or two – and then it is no longer needed, as either a subprime or bank mortgage can be used to combine both the existing first mortgage, and the private mortgage that we put in place to solve the problem(s).
Once this is done (in a year or two),the caller is left with a single mortgage, and can get back to enjoying their life – rather than stressing about collection calls, notices, and eviction letters from the bank.