What to expect when going with an alternative lender
If you’re a beginner to the mortgage world, you may be surprised to learn that not all lenders offer the same services.
Alternative lending offers solutions for borrowers in unique situations, which are not always permitted under big bank lending criteria. The banks that offer alternative lending (or B-Lending) solutions are a great option for someone looking to purchase or refinance a home when they cannot obtain standard A-side lending approval due to potential concerns over credit, income, and high ratios and many other situations where B-Lending is an optimal solution.
Who would be a candidate for an alternative lending solution?
Poor credit – Typically big banks prefer to lend to people with a credit score of 650 or higher. For clients who have a lower credit score, or are even in bankruptcy: B-Lenders are the way to go. Alternative lenders will always consider the client’s situation and what led to the lower score. Often they will want to see that there is a plan in place to increase the credit score, either by paying off debts owing or getting on a new repayment plan.
Extended ratios – All lenders use a Total Debt Servicing (TDS) and Gross Debt Servicing (GDS) ratio to ensure mortgage and housing costs are within a client’s affordability. A percentage is used to estimate the affordability using the debts, and the client’s total income. B-Lenders allow extended ratios slightly higher than the big banks, allowing you to get a slightly bigger mortgage than you would elsewhere. This means that if you have a higher ratio of debt to income than usual, you may want to go with an alternative lender.
Income – For big banks, they will usually require at minimum 2 years of your T1 Generals (the part of your tax return with your income on it) + 2 years completed Notice of Assessments if you’re self-employed. If a self-employed borrower is unable to meet a big bank’s documentation requirements, or their ratios are too high due to lower-income declared, there are alternative solutions available through B-Lenders. Most B-Lenders offer a ‘Stated income’ program, where the borrower states the actual income they earn, less their expenses, and then confirms it through bank statement deposits and invoices. Verification to confirm the business exists and is operational, is also required.
Lines of credit – Home equity lines are less common with alternative lenders but there are still some products available through select banks and credit unions. Repayment is typically based on a percentage, and the limit and rate are often determined by a client’s credit score.
What is involved in a B-Lender Mortgage?
Higher Fixed Rates – Most alternative lenders offer rates that are slightly higher than big banks, they can also change just as frequently. Usually going with an alternative lender will cost you around 1% more than a traditional lender.
Lender Fee – Most alternative lenders charge a fee of 1-2% on the mortgage balance which is taken upon closing. For a refinance, the fee can be debited from the new money being borrowed. For a purchase, the client would need to come up with the funds from their own resources and pay them at closing.
Shorter terms – Typically clients will opt for 1-2 year terms with a B-lender as the rate is slightly higher, and they may want the opportunity to switch to a lower rate elsewhere in the future. Some alternative lenders offer up to 5-year terms, however, they are less common.
Other factors to consider
Exit strategy – In any situation where the mortgage interest rate is higher than average, you want to make sure you have a clear exit strategy. This is typically where your broker or mortgage specialist will create a plan for you to move out of a B-Lender when it’s no longer suited. The plan can involve improvements to credit score, increased income reporting, reduced debt obligations and other factors.
Conventional only – Typical B-Lending guidelines permit loans at 80% Loan to Value (LTV) or less. There are some lenders in the private lending sector which allow higher LTV ratios, however, there would also be higher fees and interest rates applied. If purchasing, you would need a 20% down payment plus the lender fee and closing costs, and if refinancing you would not be able to exceed 80% of the home’s value for the mortgage, including the lender’s fee and closing costs.
Alternative lending is a great short-term solution for many borrowers who do not meet standard A-Side lending criteria. An exit strategy should always be put in place by the mortgage advisor, as an alternative lending solution is typically meant to be short-term in duration. If you are struggling with standard lending requirements or feel that this is a great short-term option for you, talk to a mortgage advisor today who can recommend the best solution, tailored to your individual mortgage needs.
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