The Lender Alphabet
The ABC’s of Mortgage Lenders
I often talk about alternative lenders in my articles so this week I want to discuss the different types of mortgage lenders a borrower may encounter when looking for mortgage financing. I look at the lenders as fitting into the A, B or C category. There are different types due to the different rates they have available, the products they carry and lastly, the requirements in order to qualify are very different from one category to the next. Below I will briefly describe the most notable differences.
Also known as ‘prime lenders’, these lenders offer the lowest interest rates in exchange for strict mortgage application and property requirements. You must meet minimum credit score levels though they most often offer generous pre-payment privileges and no upfront fees are charged. In this group you will find Banks, Credit Unions, and Mortgage Companies, also called Monoline lenders, who are lenders a Mortgage Broker would facilitate your financing through. All of the ‘A’ Lenders have to go through one of the 3 Mortgage Insurance companies available in Canada if your mortgage is higher than 80% of the home value. Working with the insurance companies allows the ‘A’ Lenders to offer niche products with a reasonable downpayment such as mortgages for the self-employed who choose to take minimal wages from their company and buyers who are New-to- Canada. As the insurance companies are taking on the majority of the risk in these cases, you not only have to meet the lender requirements, but also fit into the insurer guidelines as well.
Basically, there are a number of conditions you must meet in order for your mortgage to qualify through an ‘A’ lender. If you don’t fit into that box, don’t worry as there are other financing options available to you though you may be required to put down more of a downpayment.
In terms of document requirements, the ‘A’ lenders don’t have very much flexibility. If you are unable to provide any of the requested documentation, majority of the ‘A’ Lenders may accept some kind of alternative, though the list of alternatives is pretty short. If you do anticipate some issues, ensure you have a detailed initial chat with your Mortgage Professional about what kind of documents you will be expected to provide as it’s easier for them to know upfront about document alternatives than to ask for exceptions later.
Also known as “subprime” lenders as they tend to do the mortgage financing that the “prime” or ‘A’ lenders pass on. When you’re sitting just outside the box, the ‘B’ lenders may just be a perfect fit for you in the short term. They tend to be more forgiving and understanding if you have any credit issues, are newly self-employed or your downpayment source is not meeting the “A” lending standards. In return for overlooking some minor flaws with your financial profile, they will charge a bit of a higher interest rate and there is a chance of having to pay an upfront fee to them.
I have found that the ‘B’ lenders put more emphasis on the property than the borrower and therefore an appraisal to confirm the property value and condition is a mandatory requirement when working with the subprime lenders. You can expect shorter mortgage terms with higher rates when borrowing through a ‘B’ lender until you improve your financial position enough to qualify for a mortgage with the ‘A’ Lenders. Majority of ‘B’ Lenders max out at financing 80% of your home value though there are a few exceptions where these lenders may consider lending up to 85% or even 90% of the value of the home though again, you may have to meet additional conditions to qualify.
These types of lenders are more commonly known as private lenders and you may know them as individuals who have some extra money to lend at a relatively high interest rate with substantial upfront fees. They are still around; however, the emerging private lenders are groups of lenders such as Mortgage Investment Corporations (MICs) and Real Estate Investment Trusts. (REITs). These lenders offer considerably more flexibility for borrowers and offer products to those who may have some credit challenges or their income has been inconsistent. For those who would prefer to get a mortgage with minimal proof of income or assets, there are options available from private lenders as they work on a case-by-case basis and in turn it is up to your Mortgage Broker to negotiate a rate and term on behalf of you, the borrower.
I hope this article highlighted the many mortgage financing options out there for borrowers as even with all the mortgage rule and insurance changes announced, there are still many mortgage lenders offering niche products to fit your financing needs. Explore all mortgage avenues by working with an experienced Mortgage Professional you can trust who will help you navigate your options and determine which one best suits your lifestyle and financial goals.