Self-employment and mortgage underwriting have an awkward relationship. The tax return that keeps a business efficient is the same document a lender uses to measure income, and a good accountant’s work reduces the number the lender sees. Two people earning the same amount can present very differently on paper depending on how they are paid.
Private lending is one answer to that, and it is not the first one. This page sets out where it fits, what it costs, and what has to be true before it makes sense.
Try the Insured Route First
Before private lending enters the conversation, there is an insured product built for exactly this situation.
CMHC Self-Employed allows self-employed borrowers who can document their income to access CMHC mortgage default insurance, on the same terms as any other insured borrower. Where a business has two or more years of history and the income can be evidenced, this is the least expensive route and it should be tested first.
The same is true of alternative lenders, which sit between prime and private. They price above a bank and well below a private lender, and many of them assess self-employed income using bank statements or a stated-income approach rather than the net figure on a tax return. For a large share of self-employed borrowers who have been declined by a bank, an alternative lender is the answer and private lending never becomes necessary.
What a Private Mortgage Is
A private mortgage is funded by an individual investor, a mortgage investment corporation or a private fund, rather than by a bank or credit union. The lender is making a decision about the property first and the borrower second.
That inverts the usual underwriting. A prime lender starts with your income and credit and then looks at the home. A private lender starts with the equity in the home and how it would recover its money, and treats your income as context.
The practical consequences follow from that. Approvals are quick, guidelines are flexible, and the price is high.
The Terms You Should Expect
- A minimum of 20 percent down or 20 percent equity, and often more. Private and alternative lenders operate outside the insured mortgage system, carry the full risk themselves with no insurer behind them, and do not lend above the conventional threshold. Any suggestion that a private lender will accept less is wrong.
- A short term. Private mortgages are commonly written for a year, sometimes two. They are bridging arrangements, not long-term financing.
- Interest-only payments in many cases, which keeps the monthly cost down and means the balance does not reduce.
- Lender and broker fees, disclosed in writing before you commit, and generally deducted from the advance rather than paid separately.
- Rates well above prime lending. For a private construction mortgage in this market the range runs from about 10 to 15 percent.
- An exit strategy as a condition of the loan. The lender wants to know how it gets repaid, whether that is a sale, a refinance into a prime or alternative lender, or a business event with a date on it.
When a Private Mortgage Is the Right Answer
There is a narrow set of situations where the cost is justified, and they have a common shape: the money is needed now and the expensive period has a defined end.
- A purchase where the timeline is too short for a prime lender to complete
- Bridging between the purchase of one property and the sale of another
- Construction or major renovation that no prime lender will fund at that stage of the project
- Business income that cannot be documented this year but will be next year, once a full fiscal period exists
- Clearing tax arrears or a lien that is blocking a refinance into cheaper financing
- Credit recovery, where twelve months of clean history reopens the alternative lending market
When It Is Not
If the plan is to hold a private mortgage indefinitely, the arithmetic does not work. At double-digit rates and with fees on every renewal, a private mortgage held for years costs more than the equity it releases is likely to be worth.
The test is whether there is a credible way out, on a date, at a lower cost. Without that, a private mortgage postpones a problem at considerable expense rather than solving it. A broker who will not say that to you is not doing the job.
What Documents Help a Self-Employed File
Whichever route the file takes, the same paperwork strengthens it.
- Two years of complete tax returns with all schedules, plus Notices of Assessment
- Financial statements for the business, prepared by an accountant where they exist
- Business licence or incorporation documents, and proof the business is active
- Six to twelve months of business bank statements, which is the primary evidence for bank-statement lending programs
- Current GST or PST filings and confirmation that no tax arrears exist
- Contracts, invoices or client agreements showing forward revenue
- A recent mortgage statement and property tax assessment on any property you own
Where income is drawn as dividends or retained in the corporation, say so early. Lenders treat that differently from salary and some will add back specific expenses, which changes the qualifying income before any alternative route is needed.
How the Lender Gets Chosen
The point of working through a broker on a self-employed file is that prime, alternative and private are all on the same panel and can be tested in order rather than guessed at.
Michelle submits the file to prime lenders first, moves to alternative lenders where the income cannot be documented in the form a bank requires, and reaches private lending only where the timeline or the circumstances leave nothing else. Where a private mortgage is arranged, the exit into cheaper financing is planned at the same time rather than left until the term is nearly up.
Private Lending FAQs
Will a private mortgage damage my credit?
Not by itself. Private mortgages are frequently not reported to the credit bureaus at all, which cuts both ways: it does not harm your credit and it does not help rebuild it either. The rebuilding comes from the other accounts you keep clean during the term.
How quickly can a private mortgage close?
Considerably faster than prime lending, because the underwriting is focused on the property. Speed is one of the main reasons private lending is used, and it is one of the things you are paying for.
Can I get out of a private mortgage early?
Usually, though most carry a minimum interest period or a prepayment charge. Since the whole purpose is to exit into cheaper financing, read the exit terms closely before you sign rather than afterwards.
What if my business is less than two years old?
A prime lender will generally want two years of history. Alternative lenders are more flexible, and some will work with a shorter history where the revenue is documented. Ask rather than assuming the answer is no.
Is stated income still available?
Alternative lenders offer programs that assess self-employed income through bank statements and business documentation rather than the net figure on a tax return. These are documented programs with their own requirements, not an invitation to state a number without support.
To find out whether your self-employed file can be placed with a prime or alternative lender before private lending is considered, contact Michelle Scheibel at My Kelowna Mortgage. She is licensed by the BC Financial Services Authority and works the routes in order of cost.