Power of sale notices can be stressful for any homeowner, especially those living in Ontario. It could be deciding whether to save your home or lose it to your lender, who will sell it if you miss mortgage payments. In these urgent circumstances, homeowners consider two options to finance: traditional banks and private lenders. Whichever one you choose determines whether you save your home or lose it. This guide compares the pros and cons of using private lenders and traditional lenders. When facing a power of sale, homeowners can decide which option fits their immediate and long-term financial needs.
What Are Private Lenders vs. Traditional Lenders?
Traditional banks do not handle private loans. Instead, they are carried out by individuals referred to as private lenders. Private lenders are much more flexible in approving applications than traditional banks. They provide loans based on real estate and equity, which lets them focus mainly on property equity rather than credit scores or traditional income verification.
Traditional banks fall on the other side of the spectrum. These are handled by banks and institutions, which must follow stringent rules that translate to lending criteria. Standard lenders will consider three things for loan approval: credit history, ability to pay, and employment status. Those who are self-employed or have a questionable financial past may find it hard to obtain a loan.
Pros of Private Lenders: Less Strict Requirements
Private lenders have an advantage due to the lenient qualification process. They are mainly concerned with equity, so they give loans to people with bad credit or uncertain income. They primarily focus on a “Loan-to-Value Ratio” that looks at your home’s equity compared to the debt you owe. This makes them ideal for homeowners who don’t meet traditional requirements or find themselves in dire straits, like a power of sale.
Private lenders also process applications significantly faster than banks. They approve applications within days rather than weeks or months. This is critical in power of sale situations, where speed is necessary to pay arrears and legal fees and halt the process.
Cons of Private Lenders: Higher Costs and Risks
Private lenders have cost-related drawbacks. Borrowers currently or have recently faced financial duress are considered risky investments. That also means that these borrowers must pay higher interest rates. They are between 8% and 14%, double or even triple the rate a traditional mortgage commands.
There are additional fees to pay, too. You might have to pay appraisal fees, broker costs, and extra costs. And, because of how short-term private loans can be, there can be considerable pressure to repay them quickly. A private mortgage should be approached with particular care by borrowers to ensure that they have a concrete plan in place to prevent the foreclosure option later on.
Pros of Traditional Lenders: Lower Interest Rates, Established Reputation
Traditional lenders come with many cost-related advantages, such as low interest rates. The amount you save by pursuing this route can lead to substantial savings. They’re also willing to wait long-term for loans to be repaid, which can make payments much more manageable.
Traditional lenders’ rigid regulations have also helped them build a trustworthy reputation. They exercise complete transparency and uphold consumer rights in any way. With such provisions, loan repayment would be no issue for the borrower and a little solace to those who have to repay their loan during tough times.
Cons of Traditional Lenders: Stricter Approval Criteria
However, with their strict approval criteria and creditworthiness, power-of-sale subject borrowers often get the cold shoulder from traditional lenders. The majority want good credit, steady income, and verifiable employment history. Failure to meet these standards may cause delays or outright rejection of the application.
Traditional banks aren’t known to be fast either. It could take weeks or even months for your application to be approved, and that’s too much time for homeowners who want to prevent the power of sale. Homeowners relying on banks in an emergency can lead to a complete loss of their property.
How to Choose the Right Lender Based on Your Needs
One of the few exceptions when privately lending money occurs during the power of sale is that the lender is selected by analyzing the financial position, time factors, and ability to repay in the long term. Suppose you have already received a power of sale notice with a limited time to act. In that case, private lenders offer an immediate solution due to their quick approval processes and equity-based evaluations.
Private mortgages come with higher costs, so you need to evaluate whether you can manage them. This option is viable if your circumstances are temporary or you can repay the mortgage quickly. However, those facing severe or long-term financial difficulties should avoid them. Higher costs can be saddled with significant long-term risks, leading to increased debt.
A conventional lender would be the better long-term option when credit is pretty good and some time exists before the lender’s action. Lower interest rates and fees can dramatically ease the repayment burden and lessen the probability of further financial distress. The downside here is that with strict qualification requirements, you must be very honest in assessing your chances of approval.
Mortgage brokers and financial advisors are aware of the implications of private and traditional lending. Their guidance could provide crucial insight into which option would be better given your current conditions and tailor it to your needs.
Private lending is an option for those who don’t meet standard criteria or have an immediate problem. In contrast, traditional lending suits those with a strong financial profile, with enough time to wait for their application. So, you must analyze your financial status and seek expert advice to decide on the best lender.