Thursday, September 12, 2013

Private Mortgages - Need a Written Mortgage Commitment?

If you look to finance a purchase through a Private Mortgage – that is a lender who is not a financial institution – is the process any different with respect to obtaining a formal (written) Mortgage Commitment (MC)?  It should not be and there are a number of reasons to insist on receiving one, before moving forward.

As with any of the specifics involved with the transaction, you want to be informed in advance of all costs and obligations which pertain to the mortgage. All of the same details which we outlined with institutional lenders, may infact apply to the private mortgage. There could also be some additional ones – ie. upfront administration fees, punitive penalties for early payout, mortgage brokerage fees and the list goes on.  Best practice, is to insist on a detailed MC so that there are “no surprises” at closing.

Private lending plays an important role in the commercial property market. It is often a good option and sometimes the only option, in being able to fund a purchase. With that said, the industry is littered with closings (and non-closings), on transactions which involved private mortgages which were significantly misunderstood until the day of closing. The ramifications of this are not only costly, but painful to experience for all concerned.

As a final note and with respect to a Vendor Held Mortgage (with the Seller), a major benefit is that you are able to incorporate the terms of the MC within the body of the offer. You can not only outline mortgage amount/rate/term/amortization (the basics), but also cover prepayment options, specifics on guarantors, any details on secondary financing etc. Some of it may need to be negotiated, but you at least get it on the table
and they become terms within your Agreement of Purchase and Sale.  The Seller is often your best source of Private Financing, so make sure that is your first stop!

It’s worth repeating - the “DEVIL IS IN THE DETAILS”. Again, it’s always a good idea to review a MC with your lawyer and your Experienced Commercial Realtors upon receipt, and especially given the fact that much of it affects their task in closing the transaction.

1 comment:

  1. I understand what is said, I am starting to understand the private lending process and I need more indepth information in how to find the private lenders.