03 May
A lot of factors need to be considered when getting approved for a mortgage and in some cases most don’t even qualify. It can be discouraging for the borrower when conventional lenders such as banks or credit unions deny your application. However, it is essential to remember that there are always alternatives, and, in such circumstances, alternative lenders come into play.
What is an alternative lender?
Big banks, monoline lenders, and credit union are considered as ‘A lenders’ and they are viewed as the gold standard within the mortgage industry. The majority of the borrowers make significant efforts to ensure that they are able to receive a mortgage from such lenders. Nevertheless, there are borrowers who do not have the choice to consider other options for financing.
If the credit score of the borrower is damaged, then big institutions will not lend such borrowers money. Therefore, it becomes mandatory for them to seek their mortgage from ‘Alternative-A’ or ‘B’ lenders. These types of lenders are similar to A lenders and there are many companies that are operating in the B lending space. For example, a Mortgage Investment Corporation (MIC) is a type of organization that operates in the B lending space, and they have the regulations like the banks, have shareholders, and a board of directors. Equitable Bank and Home Trust are other examples of institutions that offer alternative options.
The goal of alternative lenders is to cater to individuals who do not have a strong credit history or have a guaranteed source of income. As a result, these lenders generally have lower entry qualifications, which are offset by higher interest rates.
Why are alternative lender necessary?
The following are some of the situations where alternative lenders are necessary:
- CRA arrears
- Income issues such as being self-employed
- Credit issues such as having low credit score,
- Unexpected liens on title
- Foreclosure situations
- Unique financing needs/opportunities.
An interesting fact to note is that beyond B-lenders, there are other lending providers present as well, they are known as Private or Unregulated lenders. In most cases, these are individuals with funds who are looking to invest, and they are not regulated by any agency which causes their rates and fees to be quite high.
Moreover, private or unregulated lenders are not required to stress test their mortgage applicants, but many will abide by lower qualification rates. Hence, obtaining an approval through an alternative lender is easier as compared to traditional bank or credit union. On the other hand, borrowers are advised to pay close attention to the deal they are getting through an unregulated lender because although their qualification criteria may be low, it may include significantly higher interest rates or penalties.
Considerations of Alternative Mortgages
Because of the ‘B’ lender space, it is essential to analyse the conditions for mortgage products being offered to certify that you are not getting a rate that you are unable to afford. Before considering an alternative mortgage, there are a few questions you should ask yourself:
- What issue is keeping me from qualifying for a mortgage today?
- How long with 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?
