Tag Archives: alternative lenders

Rates Are Historically Low, But It’s Extremely Hard to Get a Loan—Here’s Why (& What to Do About It)

Real estate, like all other asset classes, goes through market cycles. As the market goes up, property values increase, and the ability to get a loan generally becomes easier. As the market goes down, property values decrease, and the ability to get a loan generally becomes harder.

When the loans get harder to obtain, you may begin to ask yourself:

  • Why has it become so much more difficult to get a loan today, when two months ago it seemed easy?
  • And most importantly, how am I going to fund my next deal?

Do I have your attention yet? Good.

Read on, and be sure to watch the video below for further information.

Now, in order to answer the above questions, we need to take a step back and see how lending has evolved in real estate.

Recent History of Lending

I started investing in real estate when I purchased my first duplex in 2004 outside Philadelphia. I used a $30,000 private loan. Since that first deal, I have seen four different lending markets.

From 2005- 2008, real estate went through its infamous “no-doc” period, which basically meant giving out loans with no required documentation. As you can imagine, this did not end well—it caused a collapse in asset prices not seen since the Great Depression.

From 2007-2010, the pendulum swung the complete opposite way, and getting a loan became extremely cumbersome. This period was famous for the ample amount of deals to buy—but no capital to buy with.

For the last nine years, the process of getting money for a deal can be summarized in one word: easy. When I talk about getting money, I’m referring to the debt of the deal.

For example, say an apartment building costs $1 million. For simplicity purposes, I have to raise 25% (or $250K) for the deal from my investing partners, leaving the remaining 75% (or $750K) to be funded by a debt provider, such as a bank, agency, or private lender.

Obtaining that 75% debt has been “easy” up until COVID-19 hit. Now we enter what I call the “corona crazy” environment.

To put it simply, the world has changed—in almost every way—in the last two months. These changes have drastically affected an investor’s ability to get loans on deals.

Where Can You Get Money for Your Next Deal?

Your Network

The first place to look to get money for your next deal is your own network. I talk about the different ways to cultivate your network in order to raise capital in my BiggerPockets book Raising Private Capital.

But even if you could raise all the funds needed for a deal, you probably wouldn’t. Why? Because real estate’s greatest asset is leverage.

The ability to put down a 20- 25% down payment in order to obtain a large leveraged asset is a great wealth creator. (A word of caution here: the opposite is also true—too much leverage is a great wealth destroyer.) So after you raised your initial funds—usually consisting of your down payment, closing costs, capital expenditures, and operating expenses—you turn your attention to the debt market.

While it may be difficult to get a loan, the investor’s reward is that debt is currently experiencing historically low interest rates. As I write this article, the rates are between 2.5- 4%. Those are impossible to beat!

 

Certain Banks

Not all banks are lending these days. In fact, most aren’t. To understand which are, you need to know where the banks get their money.

Balance sheet lenders use the money that’s been deposited with them to fund loans. They lend it out and earn interest on the loan. Since the funds are staying on the balance sheets of the bank, the bank can hold onto the loan for as long as it chooses. These balance sheet lenders are typically smaller, regional banks.

The alternative to a balance sheet lender is a warehouse lender, where an enormous bank or a large institution like Fannie or Freddie provides, in essence, a line of credit for small intermediaries to originate loans. The main goal for a warehouse line is to originate loans and package them up to sell in order to pay back the warehouse line of credit and then repeat the process.

Mortgage loan agreement application with house shaped keyring

So, how do you know which banks to go to?

It’s simple, ask them if they’re a balance sheet lender. (You’re speaking their language now!) Again, if you’re unfamiliar with the term, it just means that the bank is loaning their own money and does not plan on collateralizing or selling the loan.

If they are a balance sheet lender, you will have a better chance of them funding your deal. If they’re not, then there’s a very good chance they are not lending at this time.

And if they are lending, you may have another problem…

Why Is It Much More Difficult to Get a Loan Right Now?

Two months ago, it seemed so easy to secure a loan. But because of COVID-19, these warehouse lines have dried up. Some of it is due to the fact that Wall Street funds were backing these lines of credit, but the main reason is the unpredictability of today’s environment. Large institutions are taking a pause and shutting off the spigot.

The second major reason is that when the debt providers underwrite your deal, they look at the income available to pay down the loan. This is commonly known as the debt service coverage ratio (DSCR).

Up until the corona craziness, residential real estate has been fairly stable from an income perspective. When people decide which bills to pay, rent is usually given the highest priority in the hierarchy of expenses. Because of this factor, banks were always able to make certain assumptions on income projections—which in turn made underwriting easier for the banks.

credit-report-loan

However, in the tumultuousness we’re currently living in, underwriters have no way of projecting what the future income for a property will be. Compounding this issue, the numbers are looking worse and not better in the near future, as unemployment approaches Great Depression levels.

With this bleak outlook, a lender’s best chance to underwrite your deal is if the current month’s rent collection is strong. This can be a saving grace for current loan applicants or a death blow if the collections weren’t so hot.

Related: 12 Influential Investors Weigh in on How to Survive the Coronavirus Crisis

The Gorilla in the Room

And now it’s time to talk about the big gorilla in the room: Fannie and Freddie, who collectively are commonly referred to as agency debt. Agency debt is insured by the federal government and provides lenders the funds needed to loan on everything from a single-family all the way up to hundreds of units.

Given the vacuum created by the warehouse lenders stopping their loans, Fannie and Freddie have changed their terms. Fannie and Freddie are now requiring anywhere from six to 18 months of operating expenses. While they do give back the funds if your deal performs, it requires the investor to raise an enormous amount of escrow just to close a deal.

Conclusion

So, how are YOU going to fund your next deal?

In short, this article is a snapshot of today’s lending environment. You need to be aware of who you should go to for the best chance of securing a loan.

There are two main options in funding a deal right now: a balance sheet bank lender and agency debt. Without strong income in the current month, a balance sheet lender most likely won’t lend you the money, and without strong reserves, agency debt won’t lend you the money.

But then again, getting into a deal without strong income and reserves may not be the best thing for you anyway.

As mentioned, if you want to hear the full discussion on this, be sure to watch the video here.

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Source: BiggerPockets.com – Matt Faircloth

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As gig economy grows, borrowers shut out of mortgage market

As gig economy grows, borrowers shut out of mortgage market 

It seems as if everyone’s got a side hustle these days. More than 40% of Canada’s millennials have worked in the gig economy over the past five years, according to a study from the Angus Reid Institute, and although they’re bringing in extra cash, their side hustle can be a hurdle to qualifying for a mortgage.

Taylor Little is the CEO of Neighbourhood Holdings and noted that more than one-third of their borrowers now identify as gig economy workers, all of whom have turned to alternative sources after being denied traditional mortgage financing. More traditional mortgage lenders look specifically for stable income streams, making qualifying for a mortgage near impossible for non-salaried employees.

Increasing unaffordability in major urban markets (and even that’s expanding beyond the long-time hotspots of Toronto and Vancouver to areas like Montreal) is coinciding with a decreasing ability for a growing demographic to get a conventional loan. At the same time, people aren’t seeing their incomes grow at the same rate as their housing costs.

There are also more opportunities now for entrepreneurship. People are not only looking for additional income, but for ways to capitalize on preferred skill sets or to engage in more flexible work arrangements. The lending challenge is dealing with multiple income streams that can be based on contract, project, season, or a combination of factors.

Some lenders are changing how they approach self-employed borrowers, but many lenders, particularly banks, are still looking at the challenge of reconciling the non-standard income stream with the framework they have to make lending decisions.

“There’s no doubt a lot of work is being done to change things, but for now, the gold standard for bank lending is to have a T4 showing steady income or six months’ worth of bank statements so you can show regular deposits,” Little said. “If you don’t conform to that, the banks have a really hard time wrapping their heads around making you a big loan.”

Little noted the irony of thinking about concentration risk in a loan portfolio versus borrower income; for a borrower with a steady salaried income, there is 100% concentration risk to their job. If that person loses that job, it goes from 100 to 0, whereas for the gig economy worker, it might go from 100 to 80, with a likelihood that they will quickly fill that gap. Borrowers are looking to diversify their income sources for any number of reasons in the same way that lenders attempt to diversify their funding sources.

“From our end, it’s definitely an area where we can help on the alternative side,” Little said. “We are not originating tens if not hundreds of billions of dollars of mortgage per year. We’re in the hundreds of millions, and because of that, we can build our own systems and look at a borrower’s application more holistically. That’s given us that flexibility to serve this part of the market.”

Around 40% of Neighbourhood Holdings’ borrowers are self-employed, Little said. He sees their role as helping borrowers buy time; they get a short-term mortgage but as they pay off their interest-only loan, they’re working with a mortgage broker to help reframe their situation and income to fit into a bank’s box.

Brokers might even want to make the extra effort to market to self-employed individuals because in many cases, these people are unable to walk into a bank and walk out with a mortgage because they’re often shut out by the banks at first glance. Changing expectations and figuring out a plan to get to their ultimate goal takes time. There’s work that borrowers can do, Little said, but it doesn’t happen overnight.

In actuality, Little said, the credit quality of their borrowers is pretty high, and they’re often some of the best types of borrowers that a lender could ask for.

“It’s not criminals and deadbeats . . . these are some of the scrappiest people that you probably want to lend to. They have three different income sources, or four, and these are people that if, if one contract goes away, they’re good at finding another,” Little said.

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THIS Is Hands Down the Best Way to Buy Property

house key in woman hand and green leaves background

Did you know that I start every single conversation with a seller with the exact same question? Probably not. I mean, how would you know?

Well, I do, and it is one of my favorite parts about real estate investing. The question I ask every seller is: “Will you do owner financing?”

Owner financing is the crown jewel of real estate (in my opinion). It affords you the ability to get into a deal a heck of a lot easier and much faster.

What Is Owner Financing?

Put simply, owner financing is when the owner of a property sells it to a buyer but acts as the lender and holds a “note” against it. Instead of paying a normal bank every month, the buyer pays the original seller every month. Going into the agreement, the seller and buyer have an agreed upon payment amount and term length, just like a buyer would with a regular bank.

Owner financing terms are normally much shorter than your standard 15- or 30-year bank mortgage. Before the agreed upon term expires, the buyer must pay off the seller with a lump sum payment, which is typically obtained through a refinance with a regular bank.

 

business colleagues meeting in boardroom going over paperwork

The Benefits of Owner Financing

Less Scrutiny

Well, what is probably the worst thing about real estate investing? I would say it is the process of acquiring a mortgage from a regular bank lender. They want your left leg and your first-born child. Or, put dryly, they want 90 days of bank statements for all your accounts, your last two years of tax returns, a personal financial statement, and your credit score. Throughout the process of gather all of this, they’ll send 43 emails, leave 31 voicemails, and ask you to sign 27 or so different forms.

With owner financing, you effectively avoid almost all of this. Mr. or Mrs. Seller, more than likely, will not run your credit and pour over your personal and financial affairs. In my experience, the most a seller is looking for is that you are a trustworthy person and do, in fact, have the ability to pull money out of your own account or get it from someone or something else in order to provide the down payment (if required) and the monthly payments.

Please do note that while Mr. or Mrs. Seller may be more relaxed with the underwriting, you do absolutely want to be sure that you can pull this off. It does not do anyone any good to tie up a seller and then not be able to execute. The seller will normally have the power to foreclose on you just like a bank would if you start missing payments (via the governing agreement for the transaction).

Quick Closing

You can close the deal quickly. Once you have agreed on a price and terms and the governing contract has been looked over by your attorney, you are effectively a brand new owner of a property.

No or Low Down Payment

Ah yes, the dreaded down payment. Mr. or Mrs. Seller, in most cases, will not hold you to the normal 20 or 25 percent down that most banks want. Most likely, he or she will not be calculating your debt-to-income ratio as it relates to your down payment and the effect it has on your monthly obligations.

Is this not what most people struggle with when buying with traditional financing? Instead, with owner financing, all of the terms are up to the buyer and the seller. You determine what is required to be handed over up front, if anything. Maybe the seller really wants a used Prius, so they require $10,000 down. Maybe he or she has $7,800 in credit card debt that they’re looking to get rid of.

With owner financing, it is important to figure out the seller’s motivation. From there, you can start to craft the terms of the deal.

close up of two men shaking hands one light skinned one dark skinned laptop in background

What Buyers Should Know About Down Payments

Here is some bonus information about down payments: If you want to borrow the down payment, go for it. Can you do with a bank? Maybe. But when I have tried in the past, I was shut down. When I did it with an owner-financed deal, nobody even blinked.

What Buyers Should Know About Interest

In addition, you have complete free range to negotiate the interest rate. On one of my first deals, I had a 10 percent interest rate—not my best negotiation. But for my second owner-financed deal, I was at 5 percent. Getting better!

Example of Owner Financing

I found an off-market deal in Connecticut. The market was smoking hot in this particular area and I knew the town like the back of my hand. I knew he was asking about $50,000 too little. I jumped on it.

Come to find out, he did have a personal loan or two that were really bothering him. The total of those loans was about $22,500. That amount ended up being the down payment. The agreed upon purchase price was $170,000. That is 13.2 percent down a far cry from the 25 percent down banks want.

It took 30 days to close. That did run a little bit long. It was due to our attorneys going back and forth with all the legalese. But I suppose it is important to make sure the contract is done right and is fair to both parties.

If you are looking for another way to get into the game without losing the shirt on your back or the girth of your wallet, take a close look at this strategy. Ask the same first questions of sellers that I ask. What is the worst that can happen?

Source: BiggerPockets.com By Ryan Deasy Aug 10, 2019

 

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Can You Qualify For A Mortgage After A Consumer Proposal?

 

After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.

Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.

When Can You Buy A Home After A Consumer Proposal?

Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.

First things first: pay off your consumer proposal completely before you take on major new mortgage debt.

If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.

Alternative lender adviceYou will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit historywith new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal)

If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.

In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.

Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first) it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.

When Can You Refinance Your Home After A Consumer Proposal?

This, too, can happen very quicklyin fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.

This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.

Should You Pay Off Your Consumer Proposal When You Refinance?

Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.

refinancing to pay off a consumer proposalI prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same timelike a home improvement project or a child’s higher education, or other family debts.

CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.

Why Would You Pay off Your Consumer Proposal Early?

1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.

2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.

Worse than that, some of them will be erroneously reporting as R9swritten off completely.

confused mortgage consumerAnd some credit cards may say they were included in a bankruptcy, even though that is not true.

A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!

If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.

3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.

And if you want a new smartphone, or lease or finance a new car, bad credit will make all this that much harder.

If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.

4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.

How Do You Refinance To Pay Off A Consumer Proposal?

First, your mortgage broker will do a thorough assessment of whether or not this is even doable. S/he will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.

An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?

Plan BAnother consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago it can make things difficult.

If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And s/he will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.

We actually see that happen less often than the other approach,which is to first apply for a private second mortgage.

In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.

During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.

After a year, (longer if that makes sense) we then refinance the two mortgages into a single first mortgage.

It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.

The Wrap

Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.

But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.

Source: Canadian Mortgage Trends – ROSS TAYLOR

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These Homeowners Need a Private Mortgage

 

But that is totally not true. More often than not, they are needed when bad things happen to good people.

And private mortgages and B-lender mortgages are the fastest-growing segment of the Canadian mortgage industry.

One reason is because it’s much harder to qualify for an A-lender mortgage now than at any time in recent memory. High home prices, in major cities particularly, result in large mortgage requirements, and the mortgage stress test can put qualification out of reach for homeowners who previously had no such concerns.

In addition, there are several situations people find themselves in which are not attractive to regular mortgage lenders. These problems require solutions, but a different type of lender needs to step forward and help the homeowner get on track. Let’s look at three such situations.

#1) This homeowner has too many debts, and his credit score is low. Notwithstanding lots of equity in his home, the banks have said no.

#2) These homeowners are in the middle of a consumer proposal. The doors to the banks are firmly closed, yet they need to finance a car purchase, and they would like to improve their monthly cashflow.

#3) This homeowner has large CRA debt. Banks and other A-lenders do not like refinancing to pay off CRA debt.

#1) Too Much Debt And Credit Score Too Low

How to use home equity to pay overdue taxesThis fellow has been living proud and mortgage-free for several years, but meanwhile has racked up credit card debt that just won’t go away. At first, people believe they can manage it down, but the crippling high interest rates of 19.99% or more make it really hard.

And when the cycle starts, they next tap into other available credit to pay off the credit cards that are giving them a problem.

When he approached us, he had a nice town home in the west end of Toronto, $115,000 of unsecured debt, and a credit score of 557. And he had no mortgage.

The minimum monthly payment on the credit card debt was not much less than his take home pay from his job!

The Solution

We could see his credit score would zoom upwards once all the debts were cleared and no remaining balances. So, we found a private lender who was happy to lend a new first mortgage on very favourable terms. An annual mortgage interest rate of 5.99%, and a mortgage fully open after three months. This means as soon as he is ready, he can refinance to an A-lender without penalty.

And when that happens, all the ugly credit card debt will be scrunched up into a mortgage at roughly 3% interest, with a monthly payment of around $500. This is a game-changer compared to the $3,000 per month or so he was paying before.

#2) In A Consumer Proposal

measures of financial distress in canadaThese homeowners both have decent jobs and more than $200,000 equity in their detached B.C. home. Three years ago they both had to file a consumer proposal after a new business venture failed and left them with lots of consumer debt.

They reached out to us for three reasons:

1) Their bank, which holds their first mortgage, has told them they will not offer a renewal in late 2020.

2) Their car lease is expiring in January 2020, and they want to exercise the buy-out option. They are being quoted crazy high interest rates on a car loan.

3) They are finding it tough, paying $1,300 each month towards the proposals, on top of their car payment, and also their mortgage, taxes and utilities.

The Solution

The solution here is a one-year, private second mortgage for around $60,000. Interest-only payments at a rate of 12%, and the monthly payment is only $600, which is half of what they are paying now on their consumer proposal.

This small new mortgage will pay off their proposal completely, and also allow them to buy the car when it comes off lease.

And after their proposal is paid off, we will coach them on rebuilding their personal credit histories. And we will send an investigation package to Equifax Canada requesting they clean up all the reporting errors. (Sadly, there are ALWAYS reporting errors in the credit report after filing a consumer proposal.)

And in late 2020, when their first mortgage matures, they won’t have to worry about the renewal. We will refinance both mortgages into one new mortgage with a different lender. They will be ready.

#3) CRA Debt Problem

Owing taxes to the Canada Revenue AgencySeveral months ago, we met a Mississauga homeowner who only owed $70,000 on his first mortgage, but he had neglected filing corporate taxes for a few years, and owed CRA significant money. There was a judgment against him for $49,000, which had been registered as a lien against the family home. And another one looming for $133,000. And he had also accumulated a large amount of unsecured debt.

If you are self-employed and owe a lot of money to CRA, your borrowing options are very slim in the world of conventional mortgage lenders. We talked about this in a previous article. Occasionally we encounter homeowners whose tax debt is so large it cannot be readily paid. The end result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

The Solution

The solution for our clients was either going to be a very large, disproportionate private second mortgage at a high interest rate (close to 12%) or to refinance the small first mortgage to a new private first mortgage at only 6.99%.

For a lengthier discussion about the costs associated with a private mortgage, you can read this article.

We took the first mortgage approach; paid off the CRA liens and all other personal debts. As a bonus, the lender allowed us to partially prepay the mortgage payments in advance, so that the monthly payment for the new mortgage would be roughly what it will be when they refinance down the road – avoiding payment shock!

Then we contacted Equifax Canada to confirm the tax liens had been cleared and waited for the client’s credit score to rocket upwards, unencumbered by a high debt load.

Sure enough, it all came to pass, and now we are refinancing the private mortgage into an A-lender, only six months later.

The Wrap

pay down debt using home equityIn our first two cases, we also gave consideration to B lender solutions. They were a legitimate option, but here the private mortgage made more “dollars and sense.”

There are many other reasons why you might one day need a private mortgage. This article told the story of three fairly common situations.

You can find a more in-depth look at why you might need a private mortgage here. If a private mortgage is in your future, you should tread carefully and satisfy yourself you are dealing with reputable people who will treat you fairly.

Source: Canadian Mortgage Trends – ROSS TAYLOR 

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When You Might Need an Alternative Lender Mortgage

 

The majority of homeowners are blissfully unaware of alternative mortgages. They presume everyone is entitled to sub-3% mortgage interest rates, with no fees of any kind.

But there is a growing, significant percentage of borrowers who need a different type of mortgage financing solution. Sometimes there is no choice. That is why the alternative lending market (B-lenders) is so important to the overall health of the mortgage industry and, indeed, our economy.

Could this happen to you? Who would you turn to if your bank turned you down for a mortgage? How would you know if you are being given the straight goods, or being sold a bunch of baloney?

Plan BIf your primary financial institution (bank, credit union, trust company) refuses you a mortgage, you need to source a mortgage broker who can explore alternative financing options for youhopefully with a B-lender solution. And if that doesn’t work out, then there are numerous private mortgage lenders, too.

Most mortgage brokers are very comfortable working with A-lenders like banks, credit unions and monoline lenders, such as MCAP. And, in recent years, a growing number have expanded their businesses to provide alternative and private lending solutions. Be sure to select a professional who is experienced with these types of specialized products when you are in the market for a non-traditional mortgage.

Mortgage brokers have access to numerous alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based lenders, including:

  • Expanded debt-service ratiossome alternative lenders will allow GDS and TDS ratios as high as 50%, and are not constrained by 35/42 or 39/44 ratios, as traditional lenders usually are. In fact, if the loan-to-value ratio is low, they can get really creative. (For example, Haventree Bank will allow 60/60 when the LTV is under 65%)
  • Tolerant of damaged credit historiesthey will reserve their lowest rates for those with high credit scores (720 and above, sometimes less) but, at the same time, may entertain your mortgage application with a score as low as 500 or even lower.
  • Receptive to forms of income that traditional lenders cannot consider, such as Air BnB income, commission income, tips and contributory income from spouses not even on title. And most are more relaxed in their approach to self-employed borrowers.

Suppose for you the door is closed to banks and all A-lenders. How did you get here? Reasons typically include one or more of the following:

  • Cannot pass the mortgage stress test: inability to meet maximum debt-service ratios.
  • Low credit scores: could be too many late payments, balances too high on credit facilities, collections and liens, or even a consumer proposal or bankruptcy.
  • Non-traditional income: could be commissioned or rely on tips and work in a cash-based business. May even be irregular part-time income. Or perhaps you rent out rooms in your home, or have Air BnB income, foster care income, disability income, child tax benefits, etc. Do you buy, renovate and sell houses, and the capital gains are your only income? You could even own “too many properties.” (Yes, that can be a thing!)
  • Self-employed: you could be a business owner with lots of expense deductions and low reported taxable income. Or maybe you have been self-employed only a short timefewer than the two years A lenders prefer to see.

How long will it take to graduate back to A-lending?

The length of time you remain in an alternative lending product will vary based on your unique situation, but the ideal timeframe is one to two years. As such, most alternative mortgages are offered as one or two-year terms. There are some lenders who offer three and even five-year terms, but this is much rarer.

There are some borrowers who remain in this space for the long haul. It is unlikely they will ever qualify for a mortgage with an A-lender because of credit and/or income issues and that’s ok. They are grateful there is a reasonable cost alternative.

What added costs come with alternative mortgages?

Interest rate

Your interest rate will be a bit higher than those offered by an A-lender. These days, they mostly range from 3.99% to 5.99%. I don’t have the stats, but it feels like a large percentage of these are in the narrower range of 4.24% to 5.24%.

And the lowest rates are typically for a one-year term, with the two-year term coming in a touch higher.

Here are some sample payments to illustrate the impact of different mortgage rates. The difference is not as much as people expect.

  • $300,000 at 2.99% with a 30-year amortization = monthly payments of $1,260
  • $300,000 at 3.99% with a 30-year amortization = monthly payments of $1,425
  • $300,000 at 4.99% with a 30-year amortization = monthly payments of $1,600

Lender fees

Most of the time, your lender will charge a one-time fee of 1% of the loan amount.

Brokerage fees

alternative lender feesWith mortgages arranged with A-lenders, your mortgage broker is paid by the lender at no extra cost to you. This is less the case with alternative mortgages, mainly because the shorter the mortgage term, the less the compensation, yet the workload is at least the same and often more intense.

Therefore, when sourcing an alternative mortgage for you, your mortgage broker will often charge a brokerage fee. They should be upfront about this exact charge early on in the process. The amount varies from broker to broker and from loan to loan. Factors brokers consider are:

  • The complexity and level of effort they anticipate is involved to fund your mortgage.
  • The size of your mortgage. The smaller your mortgage, the larger the fee may seem as a percentage of the loan amount, and the larger the mortgage, potentially the smaller the fee may seem as a percentage of the loan amount.

If you are buying a property, lender and brokerage fees come from your pocket. If you are refinancing, they are deducted from the mortgage advance, if there is enough equity to do so.

All fees and costs must be disclosed properly to you according to your provincial regulator’s rules. Lender and broker fees are paid on your funding date

Other fees

As with most mortgages, you can expect to pay for an appraisal, solicitor and title insurance.

Some lenders charge annual administration or “maintenance” fees of a few hundred dollars, and they typically charge a renewal fee if you accept one of their renewal offers. There is not a one-size-fits-all formula applied when calculating renewal fees.

Monthly property tax administration fees can also be charged (less than $5 per month).

Alternative lenders are a safe route

In the Q1 broker lender market share figures, alternative lenders Home Trust Company and Equitable Bank together held more than 13% of broker market share.

Alternative lenders are not to be feared or disparaged. They serve a very useful role in the mortgage industry and are a terrific midpoint between a bank-issued mortgage and a private lender solution.

When a mortgage borrower does not even fit into the world of alternative lenders, your mortgage broker will need to source a private mortgage solution for you. I will explore this option in future articles.

Source: CanadianMortgageTrends.ca – Ross Taylor

 

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