When conventional lenders (such as banks or credit unions) deny mortgage financing, it can be easy to feel discouraged. However, it is important to remember that there is always an alternative!
If you’re seeking a mortgage, but your credit score is damaged in some way and big institutions won’t lend you the 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 in the B lending space. Alternative lenders cater to individuals who lack a strong credit history, or a guaranteed income (recent immigrants, or the self employed, for instance). As a result, these lenders generally have lower entry qualifications, which are offset by higher interest rates.
Why is alternative lending necessary?
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 could be quite 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 an unregulated lender offers. 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, it is important to 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 down payment?
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 a bruised credit score, or 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:
How high is the interest rate?
What is the penalty for missed mortgage payments? How are they calculated? What is the cost to get out of the mortgage altogether?
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?
What is the cost of each monthly mortgage payment?
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.