When conventional lenders (such as banks and credit unions) deny mortgage financing, it can be easy to feel discouraged. However, it is important to remember your alternatives!
If you’re seeking a mortgage, but your credit score has been damaged and big institutions won’t lend you money, you’ll find yourself in what’s commonly referred to in the industry as the “Alternative A” or “B” lending space.
Much like the A-lender space (big banks, credit unions, etc.), there are various companies which operate as B-lenders. Alternative lenders cater to individuals who lack a strong credit history or a guaranteed income (for instance, recent immigrants and the self employed). As a result, these lenders generally have lower entry qualifications, which are offset by higher interest rates.
- CRA arrears
- Income issues such as non-traditional income as with self-employed borrowers
- Credit issues such as low credit score, credit arrears, current mortgage or even bankruptcies
- Unexpected liens on title
- Foreclosure situations
- Unique financing needs/opportunities
Beyond B-lenders are another alternative, which are known as private or unregulated lenders. These could just be individuals with money who are looking to invest. They are not regulated by any agency, and their rates and fees may be relatively high.
These lenders are not required to stress test mortgage applicants, but many will abide by lower qualification rates. As a result, getting approved for a loan through an alternative or uninsured lender can be much easier than going through a traditional bank or credit union. Again, it is vital to pay close attention to the deal offered by an unregulated lender. Lower qualification rates tend to come with baggage in the form of high interest rates or penalties.
Considerations for Alternative Mortgages Due to the “B” Lender space
Take a good look at the conditions for these mortgage products to ensure that you won’t get trapped with rates you can’t afford.
Before considering an alternative mortgage, there are a few things you should ask yourself:
- What issue is keeping me from qualifying for a mortgage today?
- How long will it take me to correct this issue and qualify for a mortgage?
- How much do I currently have available as a downpayment?
- Am I willing to wait until I can qualify for a regular mortgage, or do I want/need to get into a certain home today?
If you are someone who is ready to go ahead with an alternative mortgage due to bruised credit, or if you don’t want to wait until you’re able to qualify with a traditional lender, these are five questions you should ask when reviewing any alternative mortgage product:
1. How high is the interest rate?
2. What is the penalty for missed mortgage payments? How are they calculated? What is the cost to get out of the mortgage altogether?
3. Is there a prepayment privilege? For example, are you able to avoid penalties if you give the lender a higher mortgage payment once a month?
4. What is the cost of each monthly mortgage payment?
5. What does it look like when it comes to renewal?
When it comes to the alternative lending space, things can get a bit murky. If you are struggling to obtain an A-lender mortgage, I would be happy to discuss your options with you and help you source an alternative. Get in touch!