How banks approve mortgages
Banks follow strict underwriting guidelines set by the lender and by regulators. They require documented income, a minimum credit score, a debt-service ratio within their limits, and an appraisal that meets their standards. The process is thorough but slow, taking 3 to 4 weeks for a standard approval. When your file fits their box, banks offer the lowest rates and longest terms available.
How private lenders approve mortgages
Private lenders make individual decisions on each file based primarily on equity. They look at the property value, the loan-to-value ratio, and the exit strategy. Credit and income matter less, or sometimes not at all. A private lender can review a file and issue a commitment in days, closing in 1 to 2 weeks. That speed and flexibility is what makes private lending essential for time-sensitive or non-standard situations.
- Equity is the primary qualification factor
- Credit score is secondary or irrelevant
- Income documentation is flexible
- Decisions in days, not weeks
- Closings in 5 to 10 business days
Where private lenders win
Private lending is the right tool when a bank has declined or would decline the file. That includes bruised credit, self-employed income that does not fit bank ratios, non-standard properties, time-sensitive closings, power of sale situations, and construction or renovation projects. Our private mortgages page covers each scenario in detail.
Where banks win
When your file is clean, a bank is almost always the better choice. Lower rates, longer terms, lower fees, and the stability of a regulated institution make bank financing preferable for standard residential mortgages with good credit and documented income. A good broker will always try the bank route first and only move to private lending when it is genuinely needed.
Cost comparison
Bank mortgages carry the lowest rates and minimal fees. Private mortgages carry higher rates, lender fees, and shorter terms. The cost difference is the price of access and speed. For a short-term bridge, the higher cost of private lending is acceptable. For a long-term hold, a bank mortgage is the clear winner. The mistake is using private lending long-term when a bank would serve better.
Using both strategically
Many Toronto borrowers use both banks and private lenders at different stages. A private mortgage to stop a power of sale or close a fast deal, then a refinance into a bank mortgage once the situation stabilizes. A private second mortgage to fund a renovation, then a refinance into a prime first mortgage once the value is added. The broker's role is to manage that transition and make sure the private phase is short and purposeful.
Frequently asked questions
- Is a private lender safe to use?
- Yes. Private mortgages are registered on title just like bank mortgages, and the process is handled by real estate lawyers. The risk is in the cost, not the safety of the transaction.
- Can I switch from a private lender to a bank later?
- Yes, and that is the goal. Most private mortgages are designed to be refinanced into a bank mortgage within 12 to 24 months once credit, income, or property conditions improve.
- Do private lenders check my credit?
- Some do, but the credit check is informational, not a pass-or-fail filter. The primary factor is the equity in the property, not the credit score.
- Which is better for a first-time buyer, bank or private?
- For a first-time buyer with good credit and stable income, a bank is almost always better. Private lending is for situations where a bank has declined or the file is non-standard.