The Benefits of Using Alternative Mortgage Lenders
Published on 16 Jan 2023
There's no one-size-fits-all solution when it comes to mortgages. Both financial situations and mortgage needs can differ from person-to-person. With that said, people need options outside of what the standard lenders and big banks have to offer if they fall outside their lending criteria. That's where alternative mortgage lenders come in.
In this blog, we'll cover everything that you need to know about alternative mortgages.
Keep scrolling to learn about:
- What an alternative lender is
- How alternative mortgage lenders differ from prime and private lenders
- The benefits of using an alternative lender
- The mortgage solutions alternative lenders offer
Let's get started!
What are Alternative Mortgage Lenders?
Alternative lenders typically provide mortgages to borrowers that don't qualify for a traditional (also called conventional) mortgage. This is often referred to as B-lending or non-prime lending.
The reasons that borrowers may fall outside of the lending criteria for a traditional lender include:
- Higher debt
- A low credit score
- Insufficient income
- Difficulty in proving income (self-employed)
- Difficulty in qualifying for the stress test
- Rental property income does not meet lending criteria
Alternative lenders bring much needed flexibility to borrowers that can’t quite qualify for a mortgage from a prime lender.
When it comes to finding the right alternative lender for you, there are plenty of options available including:
- Financial institutions
- Monoline lenders
- Credit unions
To find the alternative lender that is most suited to you, it's best to work with a mortgage broker. They will work with you to identify your needs and match you with the right lender.
Alternative Mortgage Lenders vs. Prime Lenders
Now that we know what alternative lenders are and what they offer, let's look at how they differ from prime lenders.
First off, let's talk about prime lenders. They are financial institutions, like the big banks, that offer some of the best mortgage rates and options available to borrowers. However, qualification requirements for mortgage approval from a prime lender are the strictest among all Canadian mortgage lenders, as they follow Federal guidelines.
In comparison, alternative mortgage lenders will offer higher rates than prime lenders, but they come with more flexibility and easier qualification requirements. This gives borrowers who aren't cookie-cutter candidates, that prime lenders are looking for, a great mortgage option. In fact, many prime lenders have an alternative lending arm of their business to service this portion of borrowers that don't fall into the prime lending requirements.
Let's look at some of the key differences between these two types of lenders:
Alternative lenders require a minimum down payment of 20% for a mortgage, no matter the home's purchase price. Prime lenders only require a 20% down payment if the home's purchase price is over $1,000,000 and the borrower cannot qualify for an “insured” product.
Credit & income requirements
Both prime and alternative lenders have minimum credit and income requirements. However, alternative lenders' requirements are far more flexible than that of their prime lender counterparts. For example, a prime lender may require an excellent credit score rating of 720 or above, whereas an alternative lender may qualify the same client with a much lower credit score.
GDS & TDS ratios
Before getting into the differences, let's touch on what these two things mean:
- Gross Debt Service (GDS) is the percentage of your monthly household income that goes toward covering your housing cost.
- Total Debt Service (TDS) is the amount of your monthly household income that goes toward covering housing costs and other debts.
Prime lenders require a GDS ratio of 39% or less and a TDS ratio of 44% or less to qualify for a mortgage, while alternative lenders offer more flexibility by allowing higher GDS and TDS ratios, which also increases overall purchasing power.
Alternative Mortgage Lenders vs. Private Lenders
Like alternative lenders, private lenders are an option for borrowers that don't qualify for a mortgage from a prime lender. That said, there are some significant differences you should be aware of when deciding between the two options.
Let's take a look at these differences:
A private mortgage is typically a short-term, interest-only option offered by individuals, groups of individuals, independent institutions, or Mortgage Investment Corporations (MICs).
Alternative mortgage lenders still require income, debt, and credit qualification and will also have property requirements. Meanwhile, private mortgage lenders are typically only concerned about the property's value and the ability of the borrower to pay back the loan. Private lenders' qualification processes also don't follow conventional rules, and are more focused on the condition of the property and Loan-to-value ratio.
Private mortgages have much higher rates than alternative options because they take on considerably more risk as they are interest-only, short-term solutions that do not have standard qualification requirements for income and liabilities.
The Benefits of Using an Alternative Mortgage Lender
As mentioned earlier, alternative mortgage lenders offer borrowers a wide range of benefits, including more flexibility and less stringent borrowing requirements.
Let's look at how they can offer these benefits:
Alternative lenders aren't required to follow all of the same federally regulated guidelines as prime lenders.
Higher debt-to-income qualification ratios
Alternative lenders allow borrowers to qualify with a higher GDS and TDS ratio. This can help borrowers get more purchasing power, allowing them to buy at higher prices.
More options to qualify your income
Through their BSF (Business for self) programs, alternative lenders make it easier for self-employed individuals to qualify their income and meet qualification requirements.
Higher borrowing power
With an alternative lender, you get more borrowing power. For example, some alternative lenders provide this by allowing borrowers to qualify on the contract rate, NOT the stress test requirements.
What Kind of Mortgage Solutions do Alternative Lenders Offer?
As mentioned earlier, alternative mortgage lenders offer increased flexibility when it comes to mortgage qualification requirements. Let's look at some of the most popular solutions that alternative lenders offer for borrowers with unique financial situations.
Business for self
These programs assist self-employed borrowers who may not qualify under traditional prime lender qualification requirements.
This business-for-self program allows the borrower to use bank statements or other means to prove income over a certain period of time, as opposed to using tax documents. This is extremely useful as tax documents may not depict gross income due to tax write-offs to cover costs.
This is an excellent solution for borrowers with good credit and payment history, but who may have trouble proving their income through conventional means.
If you've had past financial troubles and have worked to improve them, they should stay in the past. Bruised credit programs assist borrowers with a past bankruptcy or delinquency that has impacted their credit as long as they can prove that it is unlikely to occur in the future.
What types of loans do they offer?
Most alternative lenders will offer the same type of loans prime lenders offer, including:
- 1st mortgage and 2nd mortgage loans for owner occupied and rental properties
- Home Equity Line of Credit (HELOCs)
- Mortgage Refinance and Equity Take outs
- Debt consolidation
Additionally, they will offer a number of other products with more flexible qualification criteria, including non-B20 options (does not qualify on stress-test), interest only mortgages, and options for rental properties with higher offset and addback percentages.
Alternative Mortgages with Pineapple
Are you on the hunt for a mortgage but think you may fall outside the prime mortgage lenders' qualification requirements? Not to worry, at Pineapple, one of our expert mortgage brokers can make that determination and, if needed, find you an alternative lender that best suits your mortgage needs.
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