“B” lender and private mortgages explained
Our last blog covered mortgage options for self-employed individuals (click here to read the blog), where we spoke about “B” lenders and private lenders. Both of these lenders are alternative mortgage lenders, which means they are substitutes for Canada’s six big banks, credit unions, & mortgage financing companies. These lenders are lenient with borrower eligibility requirements compared to the “A” lenders. They also offer more flexibility and are understanding with their policies. This makes them ideal for individuals with low credit scores, low income, and those who are self-employed.
What Do Alternative Mortgage Lenders Do?
Alternative mortgage lenders serve as additional lending options for people who may not qualify for mortgage loans from major banks or credit unions. Alternative lenders consider non-traditional income when looking at the borrower’s ability to afford a house. They consider income from rentals or investment properties, foreign income, or self-employment income. Moreover, they are not fazed by high debt levels and low credit scores because they do not mandate a stress test. This makes alternative mortgages ideal for those looking to escape rigid lender policies or acquire finance despite rejection from “A” lenders.
Different Types Of Alternative Mortgages
There are many alternative mortgage products available today that serve a variety of needs. For a better understanding of those options, please read below:
1. “B” Lender Mortgages
While “B” lenders are more accommodating than big banks, they happen to be more stringent with their requirements than private lenders. “B” lenders offer mortgage options such as interest only payments as well as allow non-conventional income sources, making them ideal for self-employed individuals. “B” lenders provide options for those borrowers with low credit scores and increased debt levels. “B” lenders offer products that are not only an alternative to securing financing outside of the stricter big banks lending guidelines, but also at a cost-effective approach. Many times, “B” lenders will be a temporary solution, usually 1-3 years, to either improve household income, lower debt, or improve that credit score, that ultimately will lead the borrower back into an “A” mortgage.
2. Private Mortgages
Private mortgages are funded by private investors instead of banks or credit unions. Some examples of private mortgage lenders are Canadalend, Clover Mortgage, Nuborrow, Alpine Credits, and Cannect. Their mortgages are not regulated by the government, enabling private lenders to lend to risky borrowers. As private lenders take on greater risk, they generally charge a higher rate of interest and fees. These may be negotiable, provided one plays their cards right and hires a suitable mortgage broker to help them out.
Where conventional mortgage options on the “A” side & “B” side require income verification and adequate credit to qualify, private mortgage lenders simply require either a larger down payment of 25% - 35% or your home equity. Their mortgage terms are also short, typically in the 1-year range. Borrowers who are denied a mortgage due to poor credit or mismanaged debt, will always have the option to secure private mortgage financing to fix their financial situation before reapplying back into an “A” or “B” mortgage.
3. Bridge Financing
Bridge financing is a very common option in today’s markets that offers home buyers the ability to bridge the gap between receiving funds from the sale of their current home and making the down payment on the purchase of their new home. This financial option is available as a short-term fix, allowing the borrower the flexibility when purchasing a new home. It reduces the pressure to immediately sell off one’s current house to complete the payment for their future home. In this circumstance, it will be important to speak directly to your mortgage broker as they will be able to set the proper financing in place through traditional mortgage lenders like the big banks, credit unions and mortgage finance companies.
4. Reverse Mortgage
Reverse mortgages provide borrowers a steady source of cash, which is the equity locked in their home. They can utilize this cash towards renovations, repairs, retirement, down payments, living expenses, traveling, college tuition for their kids and grandkids, and so much more. To acquire a reverse mortgage, one needs to be over the age of fifty-five years. Once the mortgage is initiated, no monthly payments are required. This mortgage becomes repayable only once the borrower dies or decides to move out of the house and sell it off.
5. Construction Loans
Construction loans are temporary financing products that enable the construction of new homes. There are different kinds of construction loan features, some require interest-only payments, but this may vary in other cases. Once the loan term expires, construction loans can be extended, paid back in full, or converted into an “A” mortgage. Construction loans are a great option on the alternative side for those borrowers looking for the maximum flexibility in their building process.
6. Self-Employed Mortgages
These mortgages are designed with self-employed borrowers in mind. Usually, it’s tough to get a traditional mortgage as a self-employed individual because there are a wide variety of variables and conditions to consider. With self-employed individuals, “A” lenders will typically only look at what income is claimed as a pose to the total revenue generated by the business. For this reason, alternative financing will be a stronger solution for those self-employed borrowers as these lenders will take a closer look at the overall business revenue. When comparing the tax savings, a borrower will incur by keeping as much revenue as they can in the business, to a slightly higher interest rate on the alternative side, mortgage borrowers almost always come out ahead.
7. Second Mortgages
Second mortgages are just how they sound. This option allows individuals to take out a secondary mortgage that will be in 2nd place behind their first mortgage. This allows the borrower to access their equity in their home without having to reconstruct their first mortgage. Because second mortgages are based on the value of the subject property, the more equity in the home, the more money they borrower can access.
8. Vendor Take Back Mortgages
Vendor Take Back Mortgages, or VTB mortgages, are a type of seller financing that enables homebuyers to get a mortgage from the seller of the home they are interested in. The seller will let the buyer borrow money to purchase the home and bypass mortgage lenders entirely. The buyers in this case, do not have to worry about strict lending guidelines implemented by all the big banks, whereas the seller will capitalize on interest payments, tax write offs, and likely no realtor fee’s
When Is It Best To Get An Alternative Mortgage?
Three situations call for alternative mortgages from “B” lenders or private mortgage lenders. The situations include:
a. Bad Credit
The big banks or “A” lenders require borrowers to have a credit score of at least 600 to qualify for a traditional mortgage. Alternative lenders don’t have this specific requisite. “B” lenders are willing to qualify borrowers with credit scores as low as 500. On the other hand, private lenders do not check for credit scores at all.
b. High Debt Levels
When qualifying a borrower, lenders look into their debt service ratios, that is, their gross debt service (GDS) and total debt service (TDS) ratios. These ratios indicate how much of the borrower’s income will go towards housing and debt payments. “A” lenders need borrowers to have a GDS ratio of 39% or less and a TDS ratio of 44% or less. For an insured mortgage, CMHC mortgage rules have the same guidelines.
Borrowers who find it tough to meet these conditions can work with alternative lenders as they have a higher limit when it comes to debt service ratios. For example, Haventree Bank allows debt service ratios to be as high as 60% for some mortgages.
c. Unconventional Income
Primarily, self-employed individuals, business owners, investors, and commission salespersons draw an unconventional income. This might make it challenging for them to get a mortgage with a major bank. But, alternative lenders can help borrowers with an unconventional income to get a mortgage, as these lenders have different income standards and are more flexible.
How Long Should One Use Alternative Mortgages?
The duration for which an individual should use alternative mortgages varies based on different situations. Usually, alternative mortgage terms last for one to two years. Some lenders even offer three to five-year terms, but this is a rare case with these mortgages.
The purpose of using alternative mortgages is to help borrowers fix their financial situation so that they can move on to traditional or A lender mortgages that have a lower rate of interest. Unfortunately, there are some borrowers who remain in the alternative mortgage space for the long haul. This is because their credit or income don’t match up to “A” lender requirements, and that’s alright.
How To Take Advantage Of Alternative Mortgages?
The best way to gain access to alternative mortgages is to work with a mortgage broker. Mortgage brokers have access to a wide range of mortgage lenders, including “A” lenders, “B” lenders, and private lenders. Through their network of different lenders, they can easily help borrowers find the ideal mortgage or loan for their situation. Mortgage brokers will also have a good relationship with these lenders, allowing them to negotiate excellent terms for their clients.
Costs Associated With Alternative Mortgages
When availing of an alternative mortgage, there are various fees and costs to be paid in addition to the borrowed amount. These include:
A. Interest Rate:
The percentage of the borrowed amount must be paid along with monthly mortgage installments. Typically, the longer the mortgage term, the higher the interest rate will be for a mortgage. One-year term mortgages have the lowest interest rate, while two-year term mortgages have higher interest rates.
B. Lender Fees:
Most lenders charge a lender fee for their services. It is a one-time fee that is equal to 1% of the amount borrowed.
C. Brokerage Fees:
These are the fees charged by brokers for their services. In the case of “A” lender mortgages, this fee is covered by the lender. With alternative mortgages, this fee is shouldered by the borrower. This is because these mortgages last for a short term, which translates to less compensation for a great deal of effort like finding the ideal mortgage, negotiating terms, and carrying out significant leg work. Brokerage fees will be disclosed clearly and will become payable only on the date of funding and not before.
D. Other fees:
Like with traditional mortgages, the additional fees for an alternative mortgage include appraisal, solicitor, and title insurance fees. Some lenders also charge an administration or maintenance fee every year and a renewal fee upon acceptance of their renewal offer. Monthly property tax administration fees can also be charged. These are less than $5 per month.
For more information about alternative mortgage fees and other details, reach out to Boychuk Mortgage Group, a leading mortgage broker in Burnaby, British Columbia. We are well-versed in our field and work directly with over ninety lending institutions. Through our lenders, we have access to over five hundred mortgage products to help fit your specific needs. Better yet, we know what lenders are looking for, thus allowing us to prepare your application quickly and effectively.