*This post was created in collaboration with Mortgage Maestro
With the implementation of new mortgage rules in recent years, 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 low credit score may think they’re out of luck.
If qualifying for a mortgage is hard for you, it may be time to start looking into alternative mortgage lenders.
What Are Alternative Mortgage Lenders?
Alternative mortgage lenders are generally defined as non-bank lenders. This includes credit unions, private lenders, B-lenders, and monoline lenders. These alternative mortgage lenders are generally more flexible with their requirements than traditional banks. They often cater to borrowers who fail to qualify for a mortgage with a bank due to low credit, low income, high debt or not passing the stress test.
What Are The Requirements For Alternative Mortgage Lenders?
Depending on the alternative mortgage lender you work with, the requirements for a mortgage will vary heavily.
Do You Need Good Credit?
While your credit score may not be the main attribute alternative mortgage lenders look at when assessing your application, it could impact it. Some alternative lenders may even have specific credit requirements, though it generally won’t be as strict as a bank’s requirements.
Before applying for a mortgage with an alternative mortgage lender, it’s best to check your credit score and ensure it’s accurate and free of errors. While alternative mortgage lenders look at more than your credit score, it can still impact the interest rate you get.
Do You Need To Pass The Stress Test?
Not all alternative mortgage lenders are federally regulated, so you may be able to get a mortgage without having to pass the stress test.
Do You Need A Down Payment?
Some private mortgage lenders will offer a higher minimum loan-to-value ratio(LTV). This means you may be able to get a mortgage without having to put down a high down payment.
Where Can You Find Alternative Mortgage Lenders?
You can find an alternative mortgage lender by either doing a quick search online or by working with a mortgage broker like Mortgage Maestro. Generally speaking, it’s better to work with a mortgage broker as they can help connect you with multiple reputable alternative mortgage lenders whose requirements you meet.
That way you’ll have a better chance of qualifying for a mortgage. Moreover, when you work with a mortgage broker like Mortgage Maestro, you’ll:
- Have a team of experts working to provide you with a customer mortgage solution
- Have access to competitive rates thanks to their large mortgage lender network
- Have mortgage experts guiding each step of the way.
Other Mortgage Financing Options
If you’re unable to qualify for a mortgage through a bank, there are a few other ways you can still buy a home.
Financing Alternative #1: Vendor Take Back (VTB) Mortgage
An alternative source of financing you can consider is a vendor take back mortgage. This is probably the toughest one to set up but can be very flexible depending on what you’re able to negotiate.
With a vendor take back (VTB) mortgage, the seller lends money to the buyer to help them purchase the property. However, most VTB mortgages are partially funded. Buyers will usually have a primary funding source from a bank, while the VTB mortgage will be used to cover any shortfalls. Depending on the agreement, a VTB can help cover the cost of the house, the down payment, or the closing cost.
The buyer will then make payments to the seller with interest, which is generally higher than what you’d get with a traditional lender. Do note, a vendor take back mortgage is only possible if the seller owns the property outright.
Financing Alternative #2: Rent-to-Own
The next alternative source of financing is renting-to-own. With a rent-to-own program, you’ll be able to get into a home today and not have to worry about qualifying for a mortgage until the end of your rent-to-own term. These programs are usually structured as a long-term lease with the option to purchase the home at a pre-determined price. The idea is that you can get into a home of your own today and then exercise your option to purchase once you are in a position to qualify for a traditional mortgage.
Rent-to-own programs can allow you the time you need to overcome whatever obstacle is keeping you from qualifying for a mortgage today. Whether you need to work on credit improvement, building a larger down payment, or a longer track record of income, this alternative is quite flexible and can help you address any of these problems.
Financing Alternative #3 Multiple Collateral Mortgages
As mentioned, with most traditional financial institutions, your approval chances are largely dependent on the state of your credit and finances. If you struggle with low credit, too much debt, or simply don’t make enough money to cover the cost of a mortgage. You may have trouble getting approved.
This is where a multiple collateral mortgage might be a good alternative mortgage option to consider. Here, a friend or family member puts up their own house as collateral to help you gain mortgage approval.
Getting a second property to secure your mortgage will make your application less of a risk. 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.
What Is Collateral?
When discussing the idea of mortgage lending, it’s also essential to talk about collateral. Collateral can help both your financial situation and your chances of getting approved. This refers to the offering of an asset, which is a piece of property that’s of significant value. It can, therefore, act as a form of insurance used to gain your lender’s trust. Generally speaking, collateral is required when it comes to secured loans, such as mortgages and car loans.
with a regular mortgage, the house being purchased acts as the collateral. But with a multiple collateral mortgage, both houses act as the collateral. Hence the word multiple.
Why Can Collateral Help With Loan Approval?
If your loan is secured against an asset, should you ever default on your payments, your lender has the legal right to seize your asset to recuperate part of their loss. For example, if your car loan is secured with the vehicle, therefore, your car could be confiscated. If your house is the collateral, it might be foreclosed. That being said, no matter what kind of loan you’re trying to get, offering up some kind of collateral may increase your chances of approval.
Financing Alternative #4: Bridge Loans
If you’re a homeowner who’s looking to downsize or upsize your home, you’ll need to get a new mortgage and save for a down payment. Oftentimes, homeowners will use the profits from the sale of their current home to put toward the purchase of their new home.
However, sometimes the equity in your home gets tied up because the closing date for the new home comes before the closing date of the home you’re selling.
In such cases, a bridge loan can help. It allows you to access the equity in your home without having to sell it first. It’s basically a short-term loan against your current home. It provides you with a lump sum of money you can use to purchase your new home.
Is There An Alternative To Alternative Mortgage Lenders?
While it’s not so much an alternative form of mortgage financing, as it is simply an alternative. To get approved for the mortgage you want, you can wait until you improve your financial and credit situation. Remember, your lending institution, wants to know, first and foremost, that you’ll be able to pay them back. If you’re determined to get the best mortgage and interest rates possible from a prime lender, it’s best to hold off until you improve your creditworthiness.
Why Did My Mortgage Application Get Denied?
As mentioned, banks and other traditional lenders have strict regulations to follow when qualifying borrowers who apply with them. After all, they are businesses and need to consider their profit margin before lending money left, right and centre.
Banks receive hundreds of applications a week. Lending to high-risk clients who are at could cause them to lose money, so they need to be picky when judging someone’s financial health.
Therefore, when you apply, some of the major factors that prime lenders will examine are your:
- credit history
- employment record
- gross monthly income
- down payment amount
- history of debt.
If your creditworthiness comes up short, they’ll determine that you’re too much of a risk to invest in and deny your application.
Choosing The Right Financing Option
Depending on the circumstances preventing you from getting a mortgage, one or more of these alternatives may be great options to help you buy a home. Take some time to understand your current situation, and what you want and need in your next home. Then you’ll be able to make an informed decision on which financing option is best for you.
Alternative Mortgage Financing Options FAQs
What’s the difference between an alternative mortgage lender and a bank?
Do I need to pass the stress test to get a mortgage with an alternative lender?
Are private mortgage lenders safe?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.