Negotiating a private mortgage involves debating mortgage terms that are agreeable to both the borrower and the lender. The process involves different aspects of a mortgage or loan, including the amount, the repayment period, interest rates and what collateral gets used.
Negotiating with a private lender differs from a traditional bank or credit union. These alternative lenders are more flexible, but at the same time, the loans they give out represent a higher risk. Read on to find out how the art of negotiation in private lending deals uses different metrics like the loan-to-value ratio (LTV).
Borrowers are looking for customized deals that supply interest rate options and a path through legal considerations. Understanding the benchmarks and metrics used in negotiations is the first step.
Understanding Loan-to-Value (LTV) Ratios
Traditional banks focus on credit scores, income, and employment. Private lenders emphasize the LTV ratio and use this metric as the primary measure of the quality of a mortgage. To come up with this number, these private lenders divide the amount of the requested mortgage by any existing one and the appraised market value of the house. Most private lenders won’t approve a loan if the LTV ratio exceeds 75%. Remember, the LTV indicates how much equity you have in your home.
If you're looking at refinancing, one of the ways to improve your LTV is to put down more on each mortgage payment in the months before you make a loan request.
Negotiation in Private Lending Deals
It's important to understand that negotiating with a private lender has different angles. If you're looking for a mortgage, you have several other options. Banks and credit unions are traditional sources that have rigid requirements and lower rates.
Private lenders have a simple approval process that can overlook credit, employment, and income issues. That means there's a good chance of approval if you need some help in those areas. These lenders will focus on the property, location, and existing mortgages. Negotiating with a private lender successfully means understanding their approval criteria.
Understanding the different fees and rates helps. The average for many private lenders in 2024 is between 8% and 12% for interest and 2% to 4% in lending fees. The brokers' fees are set to match the lenders' requirements.
Understanding the value of your requested mortgage is critical. Most lenders will give better deals for less risky mortgages. Mortgages for rural properties are considered to be more risky than those on urban properties. Low risk mortgage applications involve properties under 50% LTV in major cities. They attract the lowest rates and fees. Mortgages at 75%+ LTV in urban areas or 65%+ LTV in rural areas are often rejected due to high perceived risk.
It's important to remember that all mortgage lenders are averse to risk. So, borrowers need to have some solid leverage if they want to customize the terms of a loan.
Here are a few more things to consider during the negotiation process. Remember, getting multiple quotes helps. You can share them with different lenders and negotiate for the best deal.
The Appraised Value of The Property
Understanding the property's value provides borrowers with an excellent lever to negotiate. A proper appraisal looks at different features, including the number of bedrooms and bathrooms, square footage, location, and the property's age.
An appraiser will use the selling price of comparable properties in the same area to determine the appraised value for the subject property. An appraisal from a reputable company that uses the “Sales Comparison Approach” as opposed to the “Narrative Approach” will be accepted by most lenders.
Interest rates
Are you looking to get an excellent interest rate with a private lender? You can take a few steps to ensure everything goes according to plan.
- The home equity you've built in a property is a primary factor in determining the interest rate. Shopping around for the best rates is always a good plan of action. However, most private lenders require over 25% of equity before considering an application.
- These lenders look at your income level differently from a traditional institution. A private lender considers different sources of income, such as contract work and self-employment.
- Your location will make a difference to the interest rate you get. Private lenders usually ask people who own rural properties to have more equity. You'll often be able to negotiate if you have over 30% built up.
Remember to add in any additional assets before you start negotiating for an interest rate. If you have higher-value assets, like a parcel of raw land, you can use them to negotiate.
Legal considerations
Verifying that a private lender is legitimate is a critical step. The brokers they work with should have a valid lender or broker license from the Financial Services Regulatory Authority of Ontario (FSRA). This is the body responsible for overseeing lenders, private lenders, mortgage brokers, and administrators in Ontario.
Potential borrowers can look for the lender's name on the FSRA’s website.
More Negotiation Tips
Here are a few other tips to help you negotiate with a private lender.
- It's never a good idea to settle for the first offer that you get. Shopping around and getting quotes can help you find the best private lender.
- Doing some research means familiarizing yourself with the market rates for similar private loans. You can use this information as a benchmark for negotiations.
- Openly discussing the different fees and loan costs can help you decide on the best fit for your circumstances.
It's also a good idea to research some of the key loan terms so you have a good understanding. Those include prepayment fees, the repayment period, and the loan-to-value (LTV) ratio.
Finally, it's a good idea to ask for indirect mortgage benefits like prepayment privileges, longer mortgage terms, no renewal fees, and prepaid interest payments.
Mortgage Broker Store focuses on private mortgage-related products. Mortgage applications that don’t meet traditional lending requirements are a specialty.
Our team of private lenders, brokers, and licensed mortgage agents are ready to help. Let us help you get a mortgage loan that fits your requirements today.
Email ron@mortgagebrokerstore.com or call 416-499-2122.