Private Payout Refinances: Quick Tips to Get Your Deal Approved
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April 5, 2023 |
Private Payout Refinances: Quick Tips to Get Your Deal Approved
Refinancing an existing private mortgage may seem daunting, but it's actually a relatively straightforward process if you approach it with the right mindset.
Check out our Time-Saving Template!
Private lending has become a popular option for borrowers who want to buy or refinance a home. Since I joined the industry in 2008, it has only gotten harder to qualify borrowers on the A-side.
Before moving to the lending side, I still remember banging my head against the wall in 2012 when my file for a lawyer got declined. I eventually got it done, but it wasn’t without a lot of work. To be fair, the debt servicing was high and it was a unique property.
As an alternative lender, we often receive requests to refinance existing private lenders because we can provide borrowers with a way to move up the credit spectrum and eventually graduate to an A or B lender.
While the term "Private Lender" may have different interpretations, for the purpose of this blog post, we will define it as an individual or private corporation that lends out their own money.
Additionally, we will use Mortgage Investment Entity ("MIE") to refer to groups that raise money through the issuance of shares to investors, such as a MIC or a Limited Partnership. For reference, we fall under the MIE definition. This definition will provide a clear understanding of the type of lenders we are referring to in the context of this blog post.
The need for caution with private payout refinances
But it's important to remember that private payout refinances need to be handled differently than traditional refinances from banks.
Due to the extra risk involved, such as credit risk and a higher risk of fraud, mortgage brokers need to be cautious when dealing with private payouts. Especially when the request is to payout a Private Lender and not an MIE.
So what are some caution flags to look out for? Here are a few:
The request is to payout one or more private mortgages registered within the past 12 months.
The private loan is held in a numbered company or individual's name.
The private payout request is greater than $500K.
Rush refinance transactions when there is no apparent reason why the file is a rush.
Even if the payout is with an MIE, it's still important to be cautious and watch out for caution flags. However, you can also check if they are a member of industry organizations such as CAMLA, CMBA, MPC, or BCMMA. This can provide more comfort for us as a lender if the MIE has a good reputation in the industry and is a member of these organizations. You can find more information on the importance of a lender's reputation and a due diligence checklist for brokers in this blog post. By taking these steps, you can ensure that you're working with reputable lenders and provide added peace of mind for both you and your clients.
While these caution flags aren't necessarily deal-killers, they can lead to a decline if we aren't provided with the backstory. That's why it's so important to know your client and their situation.
The importance of understanding your client's backstory
If we don't have a complete backstory, our team will ask you some basic questions to help us better understand the situation. These might include:
Who is the private lender?
What type of lender is it (e.g. a MIC, MIE, numbered company, or individual)?
When did the client take out this private loan?
Where did the client find this private lender?
Why was the private loan taken out in the first place?
Why can't the borrower go to a conventional lender now?
Is the existing mortgage in good standing?
Why do we care so much about the back story?
There are several reasons why we need to gather enough information to make an informed decision that is justifiable to both internal and external stakeholders. Firstly, private mortgages and mortgages through MIEs are not reported to credit bureaus, so we cannot see the payment history. Secondly, we do not want to take on someone else's problem file. Lastly, it is crucial for us to have a clear understanding of the borrower's situation so we can provide the best possible solution. By gathering as much information as possible, we can mitigate potential risks and make informed decisions.
The New Zealand All Blacks rugby team has a famous saying, "leave the jersey in a better place," which is always on my mind in everything I do. At Neighbourhood, we want to leave your client in a better place.
This means being selective and saying no to deals that may not benefit the borrower or help them move forward on an upward trajectory. Our team understands this ethos and lives by it. It’s part of what makes us special and motivates us to work hard. Without the backstory, we can’t judge if we are helping.
We believe in helping your clients improve their financial situation and move towards their goals. If a borrower took out financing with a private lender or MIE due to a specific challenge, we want to know if they have taken steps to improve their situation. While we understand that not all borrowers are ready to graduate to the banks, making progress toward their goals is crucial to us. Additionally, as an alternative lender, we offer some of the lowest rates in our segment, which is why it can make sense for some borrowers to switch to us.
Time-Saving Template
To save on back-and-forth with your underwriter, here's a template you can use in your submission notes to provide information on the private payout:
"My client has a mortgage with [Private Lender Name] that they obtained through [Myself/Another Broker] to [Why the Loan Was Taken Out]. They cannot go to a conventional lender at this time because [Reason]. The borrower has stated that their mortgage is in [Arrears/Current].
You’ll want to provide this blurb ahead of your exit strategy. Here’s a simple template you can use for your exit strategy.
“The client plans to payout the mortgage in approximately [Time in Months/Years] by [Exit Plan, e.g. sell their home, refinance with an A lender, etc.]”
Detailing this information will increase the speed of your approval.
The importance of transparency with underwriters
Remember that underwriters are responsible for assessing and mitigating risk, and in the digital age, they have access to plenty of tools to research your client. That's why it's essential to be transparent about your client's situation and provide as much information as possible.
Our top brokers, who are some of the top alternative brokers in the country, have mastered their submission notes. They provide the good, the bad, and the ugly. Surprisingly most start with “the Ugly” first. Their logic is simple: they want us to start finding solutions for the bad and the ugly first or decline the deal immediately because they value their time above anything else.
To sum up, refinancing an existing private mortgage may seem daunting, but it's actually a relatively straightforward process if you approach it with the right mindset. As a mortgage broker, your main focus should be on understanding your client's backstory and communicating it to the underwriter clearly and concisely. By including the who, what, when, where, and why in your notes, you can help the underwriter make an informed decision and increase the chances of success. And remember to follow the example of the pros by being transparent and letting your underwriter know the good, the bad, and the ugly. With these tips and strategies, you can help your clients pay off their existing private lenders.
Author Profile
Jared Stanley is the Senior Director of Originations at Neighbourhood Holdings. He has been in the industry for nearly 15 years. In 2015, Jared was awarded Underwriter of the Year by the Canadian Association of Accredited Mortgage Professionals. He is also a motorcyclist and dog lover.