You have finally saved up money for your down payment and even have additional money available to cover the closing costs. You are now ready to get pre-approved for a mortgage and call your bank for an appointment before you start house hunting. That’s what people do. Should be easy peasy, shouldn’t it? Well maybe, but maybe not! When you tell the mortgage specialist what purchase price range you want to buy in, the news is not so good! You are told due to recent mortgage rule changes regarding the interest rates used to qualify, you can still be pre-approved to buy because you have a good job and income along with awesome credit, but the maximum purchase price is much less than you expected.
Welcome to todays world of mortgage financing! While buying versus renting continues to be a viable option, the industry has seen some big changes over the past few years due to a several mortgage rules being implemented as well as a shifting economic climate.
If you are told the only way you can be approved by a “prime” lender at the purchase price you want to buy in is to put more money down, reduce your consumer debt payments or ask someone in your family to co-sign, contact a mortgage professional for a 2nd opinion. When I say, mortgage professional, I mean a licensed Mortgage Broker who has access to many different types of lenders such as “alternative” and “private” lenders.
Based on many years of working as a banker before becoming a Mortgage Broker for the last 15, I find many buyers these days are very nervous about looking anywhere other than to the “prime” lenders with the big names that we are familiar with for mortgage financing. Their marketing dollars have made sure of it! We’re usually NOT “richer than we think”, and not everyone fits into the box that the “prime” lenders need to squeeze you into.
When I’m talking to clients who can’t possibly meet the “prime” lender guidelines about potentially considering an “alternative” lender or even a “private” lender, I encourage them to look at it as a “band-aide” approach. Whatever the reason for going through a different type of lender, the ultimate objective is to get away from renting sooner than later and to do the “work” required to eventually get into the “prime” lender territory.
The “alternative” and “private” mortgage lenders that we work with are willing to take a “common-sense” approach when reviewing a mortgage application. Yes, they also have guidelines you need to fulfill, but they are more able to look at the overall “story”.
What about the rates and minimum down payment? Compared to the “prime” lenders, the “alternative” lenders mortgage rates are higher and as of this writing, you’re likely looking at a range of about 4% – 5.99%. In addition to this, there is usually a commitment fee or lender fee charged up front of around 1% of the mortgage amount. The minimum down payment required would be 15% of the purchase price.
The most expensive type of lender is usually the “private” mortgage lenders. Their rates can range from 7-14% for first mortgages depending on your financial profile and property type and location while 2nd mortgages are priced much higher. There are considerable upfront fees charged by both the lender and your broker as the broker is NOT paid a commission as they are with “prime” or “alternative” lenders. Although minimum down payments with a “private” lender could be as low as 15%, majority of these types of lenders will require 25% – 35% down not including the upfront fee.
While “prime” lenders mortgages are qualified on the borrower’s financial profile, “alternative” and “private” lenders place more weight on the property itself, in addition to the down payment and the borrower’s ability to make the payments.
As properties in more marketable and urban areas carry less risk for the mortgage lender in the event of foreclosure, they can offer slighter better rates and higher loan to values compared to properties in rural areas or in undesirable neighborhoods.
It is important to understand the risks before getting an “alternative” or “private” mortgage loan. Ask yourself “will my financial situation change in the future so that I can switch to a “prime” lender soon? If If your answer is “no”, an “alternative” or private mortgage may not be right for you.