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Preparing for a private loan in Ontario: Steps and considerations

Alternative lenders can offer products for debt consolidation, home renovations and more

Private loans are a good alternative for people who don’t meet the qualifications of more conventional banks and credit unions. These alternative lenders are regulated in Ontario, and their products can satisfy debt consolidation, home renovation and other expenses.

Like any other type of loan, applicants need to take steps to have a better chance of acceptance. Following is a template with the information and documentation these alternative lenders seek. 

Assessing Financial Health and Preparing Necessary Documentation

Getting a private loan in Ontario requires several steps, the first of which is evaluating your financial health. While the more traditional loan strongly emphasizes your credit scores, private lenders look to another set of criteria, including your equity.

Knowing your debt-to-income ratio is essential if you're looking for a loan. Lenders generally calculate this number by dividing monthly debt payments by monthly income. Many lenders prefer this debt-to-income ratio to be 35% or less. 

Lenders will also want a good idea about your ability to repay the loan. You can start by evaluating your monthly cash flow. Finding this number is easy. Just subtract all your total expenses from your income over a certain period.

Your credit score is also essential in deciding on your financial health. You can read more about that below.

Putting together the necessary documentation involves gathering tax returns and pay stubs. Remember that self employed people must add extra documents, such as bank statements and verifiable employment information. You'll need the basics, like a government-issued ID and proof of address, to start. 

Understanding Ontario's Regulatory Framework for Private Lending

Understanding the regulations for private lending is essential since this alternative solution is popular. First, here is a quick definition. Private lenders are any non-institutionalized organization or individual wanting to profit by Lending money. They can include these two groups but exclude credit unions, trust companies, and banks.

In Ontario, private mortgage lenders are governed by the Mortgage Brokerages Lenders and Administrators Act (MBLAA). The document is designed to ensure that these alternative lenders comply with disclosure requirements and consumer protection measures.

Private mortgage lenders are not to be confused with private personal loan lenders. Personal loans do not involve any collateral and are subject to different laws.    

The Act does several things, including ensuring that private lenders are licensed under the Financial Services Regulatory Authority of Ontario (FSRA) to ensure standards of ethics and practices are covered. It also covers consumer protection measures and disclosure requirements and requires brokers to disclose risks in plain language. 

Private lenders must adhere to two other lending regulations in Ontario: the Payday Loans Act and the Consumer Protection Act.

  • The Payday Loans Act mandates that all payday lenders comply with consumer protection and legal standards. There's also a requirement that payday lenders get a license from the government, and that includes private lenders.
  • The Consumer Protection Act is a provincial law covering many different consumer transactions, including private money loans. The requirements include the right for consumers to get timely, accurate, and clear information. 

Evaluating Interest Rates and Terms Specific to Ontario's Private Lenders.

Several different factors can influence the interest rates offered by these alternative lenders. The property's value is a cornerstone, and appraisals look at features, including the number of bathrooms and bedrooms, the age of any property, the square footage, and the location.

The interest rates offered and the appraisal are closely tied together. 

Another factor that needs to be considered for these alternative loans, and one of the terms applicants will come across, is the Loan-to-Value ratio. This ratio breaks down how the appraised value is divided by the requested mortgage amount. Private lenders look for an LTV  that doesn't exceed 75 percent.  

Tips for Negotiation and Securing Favorable Loan Terms.

Understanding your rights as a consumer looking for a private loan means knowing how to negotiate. Here are a few tips you can memorize and use.

Know Your Credit Score 

Understanding your credit score gives you a base for negotiations—generally, the higher your score, the better your terms. Your payment history includes information about how you repay your credit, which can account for up to 35% of your score. Another critical part determines how much of your total available credit you’re using, which can account for as much as 30 %. According to Equifax Canada, a credit score in the range of 660 to 724 is often seen as good.

Some other things can help you get favourable rates. 

  • Understanding the best time to negotiate and secure a favourable term means keeping an eye on the rates. Refinancing and/or renegotiating to get better terms on your loan to pay off your principal faster is a good idea. However, you'll need to be aware of any prepayment penalties that can offset financial gains.
  •  Understanding the time frame can also work in your favour. Banks and lending institutions usually send you a renewal letter before the term expires. That's the time to start looking for different rates. More often than not, these renewal letters come 21 days before the term ends.

Because private lenders focus more on equity rather than some of the terms above, getting an appraisal done can help you understand your position. Securing a favourable loan term can start with enhancing your curb appeal because the first impression counts. A fresh coat of paint and clean windows can make a difference.

Remember to make a detailed list of renovations and updates before you call a home inspector. 

Are You Looking for A Private Loan? 

Mortgage Broker Store focuses on private mortgage-related products, including second mortgages. Mortgage applications that don’t meet traditional lending requirements are a specialty.

Our team of private lenders, brokers, and licensed mortgage agents is ready to help.  Let us help you get a mortgage loan that fits your requirements today. 

Email or call 416-499-2122.