How Private Mortgages Work: From Application to Funding

You've decided a private mortgage is the right solution for your situation—whether it's accessing equity your bank won't recognize, funding a time-sensitive property purchase, or stopping power of sale proceedings. But what happens next? How does the process actually work, how long does it take, and what documentation do you need to provide?

Unlike traditional bank mortgages with their 4-8 week timelines and extensive documentation requirements, private mortgages move faster—typically 1-3 weeks from application to funding. This speed comes from streamlined underwriting focused on property equity and exit strategy rather than exhaustive income verification. However, "faster" doesn't mean "casual"—private lenders conduct thorough due diligence to protect their investment.

This guide walks you through the complete private mortgage process in Ontario: what happens at each stage, what documents you'll need, timeline expectations, approval criteria, legal requirements, funding mechanics, and how to prepare for a smooth, successful experience. By understanding the process upfront, you'll avoid delays and set proper expectations.

Stage 1: Initial Application & Assessment (Day 1-2)

The private mortgage process begins when you submit an application to a private lender or mortgage broker who specializes in private lending. This initial stage establishes whether your scenario is viable and provides preliminary terms.

What You'll Provide

What Happens During Initial Assessment

The lender or broker reviews your application and conducts a preliminary assessment:

1. Equity Calculation: Estimated property value minus existing mortgages = available equity. Lender determines if you meet minimum equity requirements (typically 20-25% equity after new loan).
2. Loan-to-Value (LTV) Check: Requested loan amount ÷ property value = LTV percentage. Private lenders typically lend up to 75-80% LTV maximum.
3. Payment Ability Review: Can you afford monthly interest payments based on income? This isn't as strict as bank debt ratios but lenders need confidence you won't default.
4. Exit Strategy Evaluation: Do you have a realistic plan to repay or refinance within 12-24 months? This is critical—lenders want temporary solutions, not permanent problems.
5. Property Marketability: Is this a standard property type that's easy to sell if needed? Unique properties, rural locations, or properties in poor condition may be declined.

Preliminary Approval or Decline

Within 24-48 hours, you'll receive one of three responses: (1) Preliminary approval with estimated terms (rate range, fees, conditions), (2) Request for additional information before proceeding, or (3) Decline with explanation (insufficient equity, property type not acceptable, no viable exit strategy). If preliminarily approved, you move to Stage 2: Property Appraisal.

Stage 2: Property Appraisal (Day 2-7)

The property appraisal is the most critical step in private mortgage approval. Unlike banks that may use automated valuation models (AVMs) for low-risk deals, private lenders always require a physical appraisal by a licensed appraiser. This protects both lender and borrower by establishing accurate current market value.

How the Appraisal Process Works

1. Appraiser Selection: Lender orders appraisal from their approved appraiser list. You'll pay the appraisal fee directly to the appraiser ($300-$500, sometimes $600-$800 for unique properties or rural areas).
2. Appointment Scheduling: Appraiser contacts you within 24-48 hours to schedule property inspection. Be flexible—faster availability speeds up your approval timeline.
3. Property Inspection: Appraiser visits property, measures rooms, photographs interior/exterior, assesses condition, notes improvements/deficiencies. Inspection takes 30-60 minutes typically.
4. Comparable Sales Analysis: Appraiser researches recent sales of similar properties in your area (within 6 months, similar size/features/condition, within 1-2 km radius). This establishes market value.
5. Appraisal Report: Appraiser prepares detailed report (10-20 pages) with photos, property description, comparable sales data, and final market value opinion. Report delivered to lender within 3-5 days.

Preparing Your Property for Appraisal

While appraisers are professionals who evaluate properties in all conditions, presentation matters. Higher appraisal = more available equity = better loan terms.

What If the Appraisal Comes In Low?

If the appraised value is lower than expected, you have several options:

• Reduce Loan Amount: If you requested $200K but appraisal only supports $175K, adjust loan request to fit actual equity available.
• Challenge Appraisal: If you believe appraisal is inaccurate (appraiser used poor comparables, missed recent renovations), provide evidence to lender. They may order second appraisal.
• Bring Cash to Close: If you need $200K but equity only supports $175K, you could bring $25K cash to supplement the loan (rare in private mortgages).
• Accept Lower LTV Pricing: Some lenders offer higher LTV (above 75%) at premium rates. If appraisal is $450K instead of expected $500K, you might access same dollar amount at higher rate.

Stage 3: Underwriting & Approval (Day 7-10)

Once the appraisal report is received, the lender's underwriting team conducts a comprehensive review of your application. This is where final approval decisions are made and official terms are issued.

What Underwriters Evaluate

Conditional Approval & Term Sheet

If underwriting approves your application, you'll receive a conditional approval with a formal term sheet outlining:

• Loan Amount: Maximum amount approved based on appraisal and LTV
• Interest Rate: Fixed rate for the term (e.g., 9.99% annual)
• Lender Fee: Percentage or flat fee (e.g., 2% = $6,000 on $300K loan)
• Term Length: 6, 12, 18, or 24 months typically
• Payment Structure: Interest-only monthly payments or other arrangement
• Prepayment Terms: Can you pay off early? Any penalties?
• Conditions: Requirements to fulfill before funding (insurance, legal review, etc.)
• Commitment Expiry: How long terms remain valid (typically 30-60 days)

Reviewing and Accepting Terms

Review the term sheet carefully. Compare the total cost (interest + fees) against your alternatives. Calculate the true APR including all costs. Use our cost calculator to understand total borrowing cost. If terms are acceptable, you sign the commitment letter and move to legal documentation. If you want to negotiate (rate, fees, term), discuss with your broker—some flexibility may exist based on your profile.

Stage 4: Legal Documentation (Day 10-18)

Once you've accepted the term sheet, the legal process begins. In Ontario, private mortgages require proper legal documentation prepared by qualified real estate lawyers—this protects both lender and borrower by ensuring the mortgage is legally enforceable and property title is clear.

Selecting Your Lawyer

You need an independent real estate lawyer to represent your interests (separate from the lender's lawyer). Choose a lawyer experienced with private mortgages—the process differs slightly from traditional bank mortgages.

• Your Lawyer's Role: Reviews mortgage documents, explains terms, ensures you understand obligations, conducts title search, registers mortgage on title, handles funds disbursement
• Lender's Lawyer's Role: Prepares mortgage documents, ensures lender's security interest is properly registered, coordinates with your lawyer on closing
• Legal Fees: Expect $800-$1,500 for your lawyer (refinancing), $1,200-$2,000 (purchase), plus disbursements (title searches, registration fees)

Key Mortgage Documents

Your lawyer will review several documents with you during the signing appointment:

The Legal Signing Appointment

You'll meet with your lawyer (in-person or virtually) to review and sign all documents. This appointment typically takes 45-90 minutes. Your lawyer will:

1. Verify your identity (photo ID, proof of address)
2. Explain each document in plain language
3. Answer your questions about terms, obligations, and consequences
4. Ensure you understand the repayment requirements and default implications
5. Have you sign all documents (multiple copies for lender, lawyer, your records)
6. Collect payment for legal fees and disbursements
7. Coordinate funding date with lender's lawyer

Stage 5: Funding & Mortgage Registration (Day 18-21)

After documents are signed, the final steps occur: lender funds the loan, your lawyer registers the mortgage on property title, existing mortgages are paid off (if refinancing), and net proceeds are disbursed to you.

How Funding Works

Funding Day Example (Refinancing)

After Funding: Your Responsibilities

Once your private mortgage is funded, you have ongoing responsibilities during the mortgage term:

Monthly Payment Obligations

• Interest Payments: Most private mortgages are interest-only. You pay only the interest each month; principal remains unchanged. Example: $350K at 10% = $2,857/month interest.
• Payment Due Date: Typically 1st of each month. Mark your calendar and set up automatic payments if possible to avoid late fees.
• Payment Method: Pre-authorized debit, wire transfer, or check (varies by lender). Confirm acceptable payment methods with your lender.
• Late Payment Penalties: Most lenders charge 5-10% penalty on late payments plus compound interest. One missed payment triggers default notices.

Property Maintenance Requirements

• Maintain property insurance throughout term (lender monitors this)
• Pay property taxes on time (lender may monitor tax account status)
• Keep property in good repair (lender's security must maintain value)
• Notify lender of any major damage (fire, flood, structural issues)
• No demolition or major alterations without lender consent

Planning Your Exit Strategy

From day one of your private mortgage, work actively toward your exit strategy—the plan to repay or refinance to a traditional lender. Read our complete exit strategy guide covering: (1) Timeline to traditional qualification, (2) Income documentation rebuilding, (3) Credit score improvement tactics, (4) Property value enhancement, and (5) Refinancing application timing.

Common Questions About the Process