Alternative Mortgage Financing in 2018
With the implementation of new mortgage rules in Canada, including the introduction of the mandatory OSFI (Office of the Superintendent of Financial Institutions Canada) stress-test, it’s becoming harder and harder for aspiring homeowners to get approved for the mortgages they need. Since banks, credit unions, and other prime lenders often have strict regulations to follow when it comes to who they lend to, people who have a poor credit score or low net worth may think they’re out of luck.
How will the new stress-test affect your refinancing plans? Find out here.
If getting a mortgage has turned out to be a difficult process for you, it may be time to start looking into alternative ways to get approved.
Read this to discover the minimum credit score for mortgage approval in 2018.
Why Did My Mortgage Application Get Denied?
Before we delve into the alternative mortgage financing methods, let’s discuss the reasons why your mortgage application might have been denied in the first place. As we explained before, banks and other traditional lenders have strict regulations to follow when judging the potential borrowers who apply with them. After all, they are businesses and need to consider their profit margin before they go lending money left, right and centre.
Do you already have a mortgage? Click here to see if your renewal can be denied.
In other words, banks especially cannot be sympathetic to you just because you really want a mortgage. They receive hundreds of applications a week and lending to clients who are at risk of not paying them back could cause them to lose money, so they need to be somewhat picky when judging someone’s financial health. Therefore, when you apply, some of the major factors that prime lenders will examine are your credit (score, rating, report, history), your employment record and gross monthly income, your net worth, and your history of debt. If your creditworthiness comes up short, meaning you have poor finances or credit and/or a record of not paying back what you borrow, they’ll determine that you’re too much of a risk to invest in and deny your application.
Read this to learn how your payment history affects your credit score.
What is Collateral?
When discussing the idea of mortgage lending, it’s also essential to talk about “collateral” and how it can help both your financial situation and your chances of getting approved. Collateral refers to the offering of an asset, which is a piece of property that’s of significant value and can, therefore, act as a form of insurance that you can use to gain your lender’s trust. Generally speaking, collateral is required when it comes to “secured” loans, such as mortgages and car loans.
For a better understanding of secured and unsecured credit, click here.
So, if your loan is secured against an asset, should you ever default on your payments (meaning you don’t follow through with your loan agreement), your lender has the legal right to seize your asset to recuperate part of their loss. If your car loan is weighed against the vehicle itself, the car will be confiscated. If your house is the collateral, it might be foreclosed.
What is a deed in lieu of foreclosure? Find out here.
This is why it’s extremely important to consider the consequences of offering up collateral in the first place before you decide to do it. That being said, no matter what kind of loan you’re trying to get, offering up some kind of collateral will almost certainly increase your chances of approval.
Multiple Collateral Mortgages
Now that you have a better understanding of what’s at stake when you apply for one, let’s discuss how you can qualify for that mortgage when you normally wouldn’t. As we mentioned, with many traditional financial institutions, your approval chances are largely dependant on the state of your credit and finances. The lower your credit score and gross income are, the worse your approval chances will be. If these elements are insufficient, you might need a friend to put up their own house in order for you to gain mortgage approval. This is what’s known as a “multiple collateral mortgage” because you’ll be offering up double the assets and double the security for your lender.
Click here to learn the difference between a “collateral” and a “conventional” mortgage.
Getting a second property to secure your mortgage will make your application less risky. Be aware, however, that both you and your friend (or family member) will now go through the same approval process. If the loan is approved, both parties become equally responsible for the new mortgage. If either one of you defaults, your homes will be at risk, so be very careful when you decide to take this route.
Another alternative solution to consider would be to apply for a “bridge loan”. While this type of short-term loan won’t help you get approved for a bank mortgage right off the bat, what it will do is help you go from unbankable to bankable. In other words, it’s a way of improving your finances to the point when you’ll be creditworthy in the eyes of a prime lender.
Here’s how it works:
- You’ll apply for a mortgage from a private lender. Your interest rate will be higher but you’re more likely to get approved, even with your bad credit status.
- Making your mortgage payments on time will help improve your credit score.
- Once you’ve worked on improving your credit score, you’ll then be able to apply for another mortgage with a B-lender, which usually refers to smaller institutions outside of Canada’s big six banks. They should be able to offer you a better interest rate.
- Make your mortgage payments on time to continue to improve your credit score.
- After some time, you should be able to improve your financial standing enough to apply for a mortgage from an A-lender or big bank.
- Congratulations! You’ve now gone from unbankable to bankable.
The Old Fashioned Way
While it’s not so much an alternative form of mortgage financing, as it is simply an alternative, one way to get yourself approved is to wait until you can improve your financial status on your own terms. Remember, your lending institution, whether it’s a bank or otherwise, wants to know, first and foremost, that you’ll be able to pay them back. If that’s not the case, then your mortgage applications could be denied, no matter how many times you apply.
If this keeps happening, not only will your credit suffer even more through hard inquiries, but applying constantly is a surefire sign to your lender that you’re a financial risk and you’re being rejected all over town. So, if you’re still determined to get the best mortgage and interest rates possible from a prime lender, it might be better to hold off until you can improve your creditworthiness. Find a way to earn a higher income, spend some time paying off all your other credit accounts on time and in full. Even if you’ve had a poor record of debt in the past, your lender will see that you’ve been working hard to better yourself and will start considering you less risky. Speak to a financial advisor today for the best ways of doing just that.
Looking For An Alternative Mortgage Lender?
If you’re currently in the market for a mortgage and are interested in working with an alternative lender, Loans Canada can help match you with the best lender for your needs.