How Much Equity Do I Need for Alternative Financing?
For Power of Sale situations, equity is often the most important part of the financing decision. Alternative and private lenders may be more flexible on income or credit, but they still need enough property value to support the loan.
← Back to the Power of Sale SeriesThe More Equity You Have, the More Options You Usually Have.
Alternative lenders look closely at loan-to-value — the total amount of mortgage financing compared with the property's current appraised value. In a Power of Sale file, the new financing also has to account for arrears and other costs.
Start With the Current Property Value
An up-to-date appraisal is usually required. Financing decisions are based on supportable market value, not simply what the homeowner hopes the property is worth.
Add Up All Registered Debt
First mortgages, second mortgages, secured lines of credit and other registered claims all reduce the equity available to support new financing.
Include Arrears and Enforcement Costs
The payout amount may be higher than the mortgage balance shown on an old statement. Arrears, interest and lender legal costs must be included in the calculation.
Loan-to-Value Drives the Decision
The lower the total loan-to-value, the more potential lenders there usually are. As the required financing approaches the property's value, options narrow quickly.
Income and Credit Still Matter
Alternative lenders can be more flexible than banks, but income, credit and the overall borrower profile can still affect the lender, rate and structure available.
Sometimes There Is Simply Not Enough Equity
If the mortgage balances and required payout are too close to the property's value, refinancing may not be realistic. In that case, another strategy may be needed.
The Calculation Is More Than Property Value Minus the First Mortgage.
To know whether alternative financing is possible, we need a realistic property value and the complete amount that must be paid out. That includes every mortgage and secured claim, plus arrears and enforcement costs.
Once those numbers are known, the required loan-to-value can be calculated and compared with what alternative or private lenders are prepared to consider.
The lender needs a supportable current market value for the property.
Use current balances and payout figures, not estimates from older statements.
Arrears, legal fees, property-tax arrears and other secured obligations can affect the required loan.
Compare the total financing required with the appraised value to see whether a workable lender exists.
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