Everyone likes to believe that they will qualify for the very best rates and terms when they start shopping for a mortgage but this isn’t always a reality.
Most residential mortgages will fit into three categories:
• “A” lenders – Chartered banks, credit unions and monoline mortgage companies. These lenders offer the best rates and terms including insured mortgage products.
• Alternative lenders – These are regulated mortgage lenders. They are banks, trust companies and monoline mortgage companies. Rates are slightly higher and there may be fees to set up the mortgage. Many of these companies also offer “A” products to their clients.
• Private lenders – Investment companies and private individuals who are willing to lend their funds and typically have higher rates and fees while offering shorter terms.
An increasing number of homeowners are now turning to alternative lending solutions for a variety of reasons including it being more difficult to qualify for mortgage with the tougher qualifying rules and today’s higher interest rates.
Here are a few situations where an alternative lender can provide solutions.
You are self-employed
Writing off expenses to minimize tax implications is great for tax planning but it will leave you reporting minimal income on your tax returns. Conventional lenders want to see verifiable income while alternative lenders understand this strategy and can offer competitive products. The rates with many of these lenders aren’t much higher than the “A” lenders.
Alternative lenders have now become the lenders of choice for many business owners. The higher rates may be offset by the structuring of the corporation.
Bruised or damaged credit
We aren’t always in control and life happens—marriage breakdowns, health issues. There can be many reasons why credit can be damaged.
Alternative lenders will look at the overall picture and if there is strong income and employment history, they can offer a temporary solution while you work on repairing your credit with the intention of moving back to an “A” lender.
Non-typical income sources
With this new economy many people now have alternative sources of income – part-time employment, an online business or side gig, Air BnB, or tips. “A” lenders will want to see a two year history of this income being declared on your tax returns before they will include it in your qualifying income.
Some alternative lenders may consider this income based on the overall strength of your application.
New stress test implications
The stress test has definitely made it harder to qualify for a mortgage. You now have to qualify at a rate two per cent higher than the contract rate. Today the best rate on a five-year uninsured fixed term mortgage is in the 4.94% range, so you now have to qualify at 6.94%.
“A” lenders are restricted to working within certain debt service ratios. Depending on your down payment and credit history alternative lenders may consider extending these ratios for qualifying.
Alternative lenders have a very important role in Canada’s lending market assisting clients that don’t fit with “A” lenders.
It’s important you engage a mortgage broker that is experienced in private and alternative lending to ensure you are receiving the best options and advice including a plan for the future.
If you would like to have a conversation about possible alternative mortgage solutions please give me a call at 1-888-561-2679 or email [email protected].
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.