Alternative Lending – we say Yes when your bank says NO!
Alternative lending is a new hybrid in the Canadian mortgage lending landscape. It is institutional lending, targeted at borrowers that do not meet traditional lending criteria.
Borrowers might not qualify for traditional lending because their credit is below the minimum required. Moreover, a borrower with impeccable credit history, may also not qualify for mainstream lending. The latter might be due to high debt service ratios( TDS and GDS), or are self employed and cannot prove their income.
We are seeing more excellent credit borrowers turning to alternative lending or B mortgages. Moreover, B lenders have effectively reduced their pricing aimed specifically at these high credit score borrowers. As of today, the lowest pricing for a B mortgage for a borrower with a beacon of 680+ is 2.99%.
Another advantage of B lending mortgage is the term is usually much shorter. 1 2 or 3 years are common. This allows a borrower not to be locked in for any longer than it would take for credit improvement and qualify mainstream.
What are credit Impediments? Recent discharged bankruptcies, paid or unpaid consumer proposals are instances considered. There is no mandatory waiting period of discharge so a borrower can qualify after 1 day of discharge. Other derogatory credit is, collections, written off debts, and consumer debt arrears. Lastly, late payments on consumer loans and credit cards negatively affect borrowers. History of late payments on mortgages are not taken lightly either.
Finally, it helps borrowers who do not have established credit histories.
Alternative lending will consider credit scores as low as 500, albeit with higher interest rate and lower lending percentage.. Lower end scores may affect pricing and lending values.
Alternative lending Debt Service Ratios
They are more flexible with debt service ratios. Conventional lenders lend based on GDS and TDS of 32 and 42. Alternative lenders offer more flexibility. Some may go as high as 45 and 50. In some cases where LTV% is 65% or less, ( equity basis) the GDS and TDS may even reach higher proportions on non conforming loans. The stress test has turned higher credit score borrowers to alternative lending solutions.
DOCUMENTATION and Business for self Borrowers:
Other advantages of B lending is the flexibility with documentation. This is particularly so for self employed individuals. Instead of needing 2 years of Notice of Assessments and average of line 150 being high enough to qualify they will need to 6 to 12 months worth of bank statements. This is to show ample cash flow received.
But there are some down sides with Alternative lending. Pricing and a tighter lending value or LTV%.
Property location is of significant importance in B lending. Lenders focus on major city areas with populations of 50,000 or more. They may consider smaller outlining areas but with reduced lending values. For example in Toronto and Gta areas lending maximums are set at 80%. In outlining smaller areas maximums may be set at 75, 70, or 65%. Generally this applies for both purchases and refinancing.
Pricing or rates current offered start at 1% to 2% above the best 5 years rates. Another draw back is, instead of having insurer premiums, lenders will charge a 1% lender fee. Brokers usually charge a fee because of the extra work involved in these files. The lender also does not compensate the broker based on the time required to complete these complicated files.
In Alternative lending terms are shorter then in conventional financing. Terms of 1 to 3 years are common. The shorter term allows the borrower time to improve their credit. At the end of the term the borrower could qualify mainstream.