Plan B – Alternative Lenders
So, you want to buy a home or refinance your existing one, but your credit rating may have some bruising , maybe you have a lack of credit , you are self-employed and don’t have a guaranteed annual income or there’s a bankruptcy in your past. You’ve approached the major Canadian banks – Plan A lenders – about obtaining a mortgage, but you’ve been turned down from the banks– perhaps it’s credit rating , credit length of history, or perhaps you aren’t able to pass the federal government’s mortgage stress test. Yet, you are confident you can make a sizable down payment and keep up with monthly mortgage payments, if only someone would give you a chance. Are there options?
Yes, says the Wilson Team of mortgage brokers professionals. The next stop on the search for funders is at the (virtual) doorsteps of Plan B, or alternative, lenders. B lenders specialize in subprime mortgages, or mortgages issued to individuals who the banks have deemed as being higher risk or repayment.
The B Team
Plan B lenders are non-traditional banks or lending sources that are still subject to supervision by the federal government’s Office of the Superintendent of Financial Institutions (OSFI). These include trust companies, credit unions, tier 2 banks and monoline institutions (organizations providing only one specific mortgage product). They cater to borrowers who do not meet the stringent bank guidelines for one reason or another.
Generally, B lenders are a good alternative. They do require a credit score, but their bar is not set as high as that for the Big Six banks. However, they do charge higher interest rates — usually are about one-to-two per cent higher than those offered by the Big Six banks.
Let’s face it, the reason it can be so hard to get a mortgage with the Banks is because of historical low mortgage rates so this means that you can still get a mortgage with a great rate! You can still start to build equity and make your house a home.
B lenders set mortgage rates on a case by case basis, depending on:
- Your credit score;
- The contents of your credit report;
- The amount of your down payment; and
- Your income and its stability.
Each B lender weights these factors differently, so the rate a borrower is offered may vary.
By using a B lender, a borrower may find there is tolerance for:
- Expanded debt-service ratios. Some alternative lenders will allow gross debt service and total debt service ratios as high as 50 per cent and are not constrained by the ratio used by traditional lenders. In fact, if the loan-to-value ratio is low, they may be very flexible.
- Damaged credit histories. They may entertain your mortgage application with a score as low as 500 or even lower.
- Forms of income that A lenders can’t consider. For example, B lenders may look at Airbnb income, tips, commission income, and income of a spouse who is not on the title. Most are comfortable dealing with self-employed borrowers, a boarder in your home or other contributory income, even higher rental income.
When thinking about using the services of a B lender, be aware that:
- There are fees for using the services of a B lender, often 1 to 3% as these lenders are not usually lending money for the normal 5 year terms. They are meant to get you into the home and help get over the hump which is usually 1-3 years and then you can move over to the A side
- Keep In Mind that you are NOT paying heavy CMHC of 2 to 4%. B lenders do not require their clients to pay insurance premiums because the lenders are self-insured, however, subprime mortgages usually have fewer features than standard mortgages.
- B lenders can only offer mortgages up to 85% per cent of a property’s value. Therefore, you will need a down payment of 15% per cent to qualify or own only 85% per cent of your appraised value of the home after financing.
- Generally, B lenders offer fixed-rate mortgages, so borrowers can plan for their monthly cost for the entire term of the mortgage.
The terms for mortgages from B lenders are usually short, generally ranging from six months to three years. Potential homeowners often use B lenders as steppingstones to a mortgage with an A lender. A short-term mortgage with a B lender offers the borrower time to improve his/her credit rating or settle into a stable job. In fact, some A lenders have offshoots that offer B mortgages and make the transition easy when the time comes.
B lenders fill a need in the mortgage marketplace and are an excellent alternative source of financing. We at the Wilson Team of mortgage professionals will be happy to explain to you how a B mortgage can work to your advantage, whether you are buying your first property or refinancing an existing one.
How to Use a First or Second Private Mortgage, A Loan that Benefits Everybody
A private mortgage is a loan made by an individual or a business that is not a traditional mortgage lender. Whether you’re thinking of borrowing for a home or of lending money, private loans can be beneficial for everybody if they’re done correctly. As you evaluate the decision to use (or offer) a private mortgage, keep the big picture in mind.
Typically, the goal is to create a win-win solution where everybody gains financially without taking too much risk.
Private mortgage or hard money? Hard money lenders are useful for investors and others who have a hard time getting approved by traditional lenders. They are often more expensive than other mortgages and require low LTV ratios.
A Private Mortgage Might Be Right For You
There is a stigma attached to private mortgages and it needs to end. Private funds are one of the largest growing financing segments in Canada. With Canada’s stricter mortgage rules, it is making alternative financing more popular than ever. From 2016 to 2019 the percentage of private mortgage transactions grew from 12 per cent of all mortgage lending to 20 per cent, is a 67 per cent increase.
Private money is all about equity lending, an arena where the banks used to be able to compete. Equity lending means that when a client has great credit and pays their bills, but doesn’t not have the traditional income to support the lender’s stiff guidelines, they are able to borrow against the fact that they have good equity built up in their homes.
In the past, the banks would lend up to 65 per cent of the value of the property, but they no longer make that option available. As a result, private lenders are meeting that need instead.
At the Wilson Team of Mortgage Experts, we are intimately acquainted with private lending. We have personally borrowed private funds as investors for acquisitions and we have our own funds invested in private mortgages. We can teach everything you need to know about both. We are self employed Investors that use private money all the time to grow wealth while we get to tax deduct the interest and the fees.
This is just one great way to use private funds. Many types of consumers can take advantage of private funds. They can be used for such purposes as construction, land, bridging, VTB’s, and rehab homes. It can also be just as simple as obtaining the funds to pay some outstanding income tax arrears or saving a very large mortgage penalty with a BIG bank when they may not lend you the funds.
Another way to take advantage of private funds is when you or a family member retires. You want to get the home fixed up, renovate or add a secondary dwelling before selling, but due to a new pension or a lower income, the banks won’t lend the additional funds. Private funding can be a great temporary solution, as you only have to pay the interest.
One of the major reasons we see for borrowing private funds is when someone becomes ill or passes away; the family income may not be able to be proven the same way, the credit has taken a hit due to high debt loads and the banks see it as a risk. In a case like this, we would recommend a second mortgage for the amount owing to wipe the slate clean and get the credit built back up; they can then go back to the first bank to do a refinance or do a carry over for the estate.
Many clients who are ill or have a loved one needing care find themselves in a difficult financial position for some time, due to the travel required or the need to take time off work, along with medical expenses that are not covered by insurance. As a prospective homeowner, investor or current homeowner, you may discover that private mortgages are a wonderful solution. Let us, the Wilson Team of Mortgage Experts, find you the perfect private lender.
Private Mortgages Explained
A private mortgage is mortgage funded by private investors. Generally, it is a short-term loan of one to three years that provides bridge financing to get you started on the path to equity and gives you the ability to refinance with a financial institution. The private mortgage is generally available for up to 85 per cent of your potential equity in a home. For example, if you plan to purchase a home for $100,000, a private mortgage would provide up to $85,000. In some circumstances there is the ability to go higher than the 85 per cent. Each case is analyzed based on situation, exit strategy and reason for the funds.
Private lenders come in various shapes and sizes, but they generally fall into one of three categories:
- The individual lender: A private individual who invests in mortgages as a way of earning a return on investment that the lender considers more reliable than the stock market.
- The mortgage investment company (MIC): A company that uses a pool of money from various individual investors to make mortgage loans on a case-by-case basis.
- The mortgage syndicate: A group similar to a MIC that generally funds large projects, such as a condominium development, and may fund a number of projects at once.
We at the Wilson Team of Mortgage Experts will discuss your requirements and circumstances with you and match you with a lender who can meet your needs.
Why Consider a Private Mortgage?
Conventional mortgages aren’t right for everyone. Traditional lending institutions tend to prefer cookie-cutter applicants whose circumstances fit a checklist of characteristics. You may wish to consider aprivate mortgage if, for example:
- You are self-employed or work on commission, meaning that your income fluctuates;
- You need quick turnaround on your mortgage loan and don’t want to wait for the usual lengthy approval process;
- Your income-to-debt ratio is high;
- You’ve recently filed for bankruptcy;
- You are buying an unconventional property, such as a rehab, castle, church or a farmhouse;
- You want to build on vacant land;
- You plan to purchase a pre-fabricated home;
- Your home has structural issues or water damage; or
- You don’t have a stellar credit history, making you too high a risk for traditional lenders
- You are an investor with lots of equity
- Major renovation
- And much more
What Are the Major Benefits?
Private lenders aren’t obsessed with every detail of your financial life and are more flexible in their thinking about what constitutes a reasonable risk. The investors are looking at sustainability, exit strategy, type of property, and equity. Its make sense lending. You can get terms from 3 months to 3 years.
You also get personalized service. We at the Wilson Team of Mortgage Experts will strive to offer you a choice of private lenders, investors and alternative options. rather than a single option, and we will ensure that they understand your situation and your needs.
Private lenders may also facilitate your move to a bank loan after a year or two, rather than leaving you to fend for yourself. Investors of this type are interested in loaning money and getting quick returns on their investment, so private mortgages are designed to be short term.
What Are the Key Criteria?
Since you are potentially a higher-risk client than the traditional buyer, based on your credit history, your income or the type of property you plan to purchase, the private lender will look seriously at a variety of factors in making a decision:
- Property Type and Value: The lender will ensure that the potential property is appraised thoroughly; it must be in good condition or you may be considered a poor risk.
- Down-Payment: Private loans require a down-payment of at least 15 per cent. It is always advisable to offer more, if you have the money available, because it gives you a larger stake in the property, something potential lenders see as a good sign.
- Income: If your income stream is regular and confirmable, it makes it easier for private lenders to feel comfortable about a mortgage loan. If your income fluctuates, you can provide tax information to reassure them; otherwise, they will base their assessment on general averages for your job type.
- Equity for Refinancing: If you’re refinancing, rather than purchasing, private lenders may provide as much as 85 per cent of the equity value of your home as a loan. However, that is not guaranteed – in certain regions, 75 per cent is more common.
The Process Once you make your mortgage application, things move quickly. Private lenders generally approve applications within a week and are able to provide you with the necessary funds within two or three weeks of approval. In applying for and obtaining a private mortgage, you must be prepared for the associated fees and costs. Private broker and set-up fees will probably cost between one and three per cent of your mortgage amount, while interest rates may range anywhere from 6 to 18 per cent. Interest rates for private mortgages are higher than bank rates, because you are deemed a riskier investment than the average loan applicant, and a private lender is putting his/her personal money on the line. He/she has no safety net in the event that you are unable to repay the loan.
Why Go Private?…
The world is full of lenders, including big banks, local credit unions, and online lenders. So why not just fill out an application and borrow from one of them?
Qualifying: For starters, borrowers might not be able to qualify for a loan from a traditional lender. Banks require a lot of documentation, and sometimes your finances won’t look the way the bank wants. Even if you’re more than able to repay the loan, mainstream lenders are required to verify that you have the ability to repay, and they have specific criteria to complete that verification.
For example, self-employed individuals don’t always have the W2 forms and steady work history that lenders like, and young adults might not have good credit scores(yet).
Keep it in the family: A loan among family members can make good financial sense.
Borrowers can save money by paying a relatively low interest rate to family members (instead of paying bank interest rates). Just be sure to follow IRS rules if you plan to keep rates low.
Lenders with extra cash on hand can earn more by lending than they’d get from bank deposits like CDs and savings accounts.
If you’d like to close on that property sooner, rather than later, and banks aren’t a viable or preferred lending option, a private lender could be right for you. Give us, the Wilson Team of Mortgage Experts, a call and we’ll be happy to connect you with a lender who meets your needs.