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Alternative Lending 101

If you’re thinking of getting a mortgage, like most, 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 of 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 available about alternative lending products unless one knows where to look. Don’t be discouraged by a mortgage decline and 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 or go through an independent mortgage professional. If you have been declined for a mortgage, before you accept a “no” answer, make sure you have explored all of your mortgage options. This may be the time to seek out a mortgage professional that not only has experience in alternative lending but has the connections to many alternative lenders too.

Alternative lending is different than private lending

Private lenders are usually one individual or a group of individuals who 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 as you don’t qualify with an alternative lender, 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. This is where the help of an experienced licensed mortgage professional could likely be of benefit to you.

Alternative lenders make more exceptions

This is one of their most attractive features; it’s basically the reason for going through an alternative lender, as prime lenders have a box they like the borrower to fit in. Alternative lenders differ from their prime counterparts, whether it’s bruised credit, limited income history or a unique downpayment source. In exchange for relaxed requirements, you could be charged a higher interest rate and a fee which may be added to the mortgage, exact costs will depend on your unique financial circumstances.

Payout penalties may differ with some alternative lenders

Most lending commitments feature two 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 and open term 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 should their financial circumstances improve. 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 higher interest 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 favorable 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 center, 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 downpayment 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 Anti-Money Laundering guidelines. An experienced 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.

For all your mortgage needs, contact Jackie at 780.433.8412 or info@mortgagegirl.ca. Stay in the loop by following on Twitter @mortgagegirlca.

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