What is an Alternative Lender and Why Might I Need One?
In this article we’re going to look at alternative lenders and why you might need one.
What is an Alternative Lender?
An alternative mortgage lender is a lender outside the big banks. Pretty much everyone is familiar with the big banks. But that familiarity can come at a cost.
The big banks, also known as A or prime lenders, have pretty rigid mortgage qualification criteria. You’ll need to qualify for debt servicing ratios based on your income, credit score and the mortgage stress test. If you’re not able to qualify, that’s when you might need to explore other mortgage options, mainly alternative mortgage lending options.
Alternative lenders are lenders with less strict mortgage qualification criteria. Alternative lenders make it easier to qualify based on your income, credit and debts.
For example, a prime lender may want you to have at least two years of tax returns if you’re self-employed before they allow you to use your income to qualify for a mortgage. Whereas an alternative lender may be okay with using your income if your business has only been around for a few months.
Alternative lenders also aren’t required to use the mortgage stress test. The fact that you may be able to qualify based on the lower contract rate of your mortgage instead of the higher stress test rate means you could qualify to borrow a lot more.
What is an Alternative Mortgage?
An alternative mortgage works just like a standard mortgage. You make your regular mortgage payments based on an agreed-upon repayment schedule. That being said, there are some key differences to be aware of.
Firstly, alternative mortgage rates are almost always higher than prime lender mortgage rates. But an alternative lender helps get the job done. If you want to own a property today, an alternative mortgage may be your only option.
Alternative mortgages also tend to come with fees. The lender fees are usually based on the mortgage amount you’re borrowing. For example, a 1% fee would be based on 1% of the mortgage amount you’re taking out.
Lastly, there’s no such thing as an insured alternative mortgage. Therefore, you’re required to be putting at least 20% down. If you can’t afford to put 20% down, either from your resources or a gift from your family, alternative lenders are off the table for you.
Why Might I Need an Alternative Lender?
You might need an alternative lender when you don’t fit with a prime lender. For example, if you’re newly self-employed or you have debt owed to the Canada Revenue Agency, that’s when an alternative lender can help you still get the mortgage financing you need.
Private lenders are always another option. However, the rates on private mortgages tend to be higher, so it’s almost better to explore an alternative lender first.
The Bottom Line
Are you interested in looking into alternative mortgage lending options? Reach out to our mortgage experts today for a helping hand.