Alternative Lending 101
If you’re thinking of getting a mortgage, if you are like most of us, you’ve likely done some research to see what’s required in order to be approved. But what happens if you don’t meet ALL the requirements? Welcome to the world of alternative lending. These mortgage offerings are geared towards a borrower who needs a lender to work with them in a common sense way that meets both the borrower’s needs and the alternative lenders rules and guidelines. There is a lot of material available about the typical mortgage product that comes with best rates, reasonable payout penalties and flexible pre-payment privileges, however, there seems to be limited information on the alternative lending products unless one knows where to look. Don’t be discouraged by a decline, keep reading for details on other options available.
Everyone is a bit alternative
There are multiple avenues you can take to get a mortgage approval and it’s important to pick the one that’s right for you. You can go directly to your bank branch where you have been doing business for many years, meet with one of the bank’s mortgage specialists or go through an independent mortgage broker. It’s likely all of these channels offer some kind of alternative if you have been declined and if they don’t offer, be sure to ask for a referral. Before you accept a “no” for an answer, make sure you have explored all of your mortgage options. This may be the time to seek out a mortgage professional who has not only experience in alternative lending but has the connections too.
Alternative lending is different than private lending
Private lenders are usually one individual or a group of individuals that have pooled their funds together for the purpose of mortgage lending. Alternative lenders tend to be larger corporations with multiple mortgage funding channels, including some banks too. My suggestion is if you find yourself having to go with a private lender, do be sure you are with a reputable private lender as there are fewer government bodies monitoring the actions and practices of the private lenders than the prime and alternative lenders. Could make sense to have a broker help you who will charge a fee versus you sourcing out your own private lender. May be less expensive at first, however, could cost you much more when it’s all said and done if you aren’t fully aware of their guidelines should you ever default on even just one payment.
Alternative lenders make more exceptions
This is one of their most attractive features; it’s basically the point of going through an alternative lender. Prime lenders have a box they like the borrower to fit in for them to qualify you for a mortgage. This is where alternative lenders differ from their prime counterparts. Whether it’s bruised credit, limited income history or a unique downpayment source, alternative lending is available for the out-of-the box borrower. In exchange for relaxed requirements don’t be surprised if you’re charged a higher interest rate and a fee which may be added to the mortgage, both of which will be quite reasonably priced.
Payout penalties may differ with some alternative lenders
Most lending commitments feature 2 payout penalty calculation options, 3 months simple interest based on your outstanding mortgage balance or the interest rate differential, whichever is the greater. Interest rate differential or IRD as it is commonly known as is calculated on your outstanding mortgage balance, time left in your term as well as the difference between your existing rate and the best rate available at the time you break your term. Where alternative lenders differ is a mortgage through them may include additional fees should you choose to end your term prematurely. Avoid any surprises by fully understanding the potential payout penalties that may come with your alternative mortgage.
What terms and products do alternative lenders offer?
Majority of alternative lenders offer 1 – 5 year terms and some even have variable rate options. I find majority of borrowers choose to take terms of 3 years or less which minimizes the possibility of having to incur a payout penalty. The shorter terms encourage transition rather than permanence and what I mean by that is if you’re getting charged a higher interest rate it’s a good idea to have an exit strategy so you’re not paying more forever. The ideal scenario would be to improve whatever forced you out of the prime lending market into the alternative in the first place and that way you can eventually refinance with a prime lender who has more favourable terms.
Property is really important to alternative lenders
When it comes to alternative lending, the collateral for the mortgage is one of the most important components of whether you do or don’t qualify, the collateral in this case being the subject property and land. Given these lenders are making exceptions in the requirements for the borrowers, they tend to be more reliant on the strength of the property. The property has to be in prime condition and located in a marketable city centre, or at least very close to one.
Alternative lenders ask for less documentation
An alternative lender will work with you on document requirements such as employment and down payment confirmation while at the same time meeting their rules and guidelines. Basically, you will still be expected to show you can make the mortgage payments and can also document where your downpayment came from so it conforms to Canadian money laundering guidelines. Your favourite mortgage professional should be able to advise you of what documentation is required for each of the different lenders.
If you’ve been declined for a mortgage an experienced mortgage professional can help make the process pain-free by ensuring you’re educated about your options and confident with your decisions. They can also help you strategize an effective exit plan to get you back to best rates.