Alternative Mortgage Financing in 2020
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 in 2018, 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.
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.
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.
Banks 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 history, your employment record, and gross monthly income, your net worth, and your 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. However, all is not lost, there are still ways for you to mortgage your house.
Read this to learn how your payment history affects your credit score.
Financing Alternative #1: Bridge Loans
An 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.
Financing Alternative #2: Seller Financing
The second alternative source of financing you can consider is seller financing. This is probably the toughest one to set up but can be very flexible depending on what you’re able to negotiate. The most popular form of this would be a case where the seller of a home may be willing to offer a Vendor Take Back (VTB) mortgage where they hold back a mortgage on the property in order to help you finance the purchase.
In this case, the rate and terms will depend on what you’re able to negotiate with the seller, and you’ll have to make sure you find a first mortgage lender that allows for this arrangement. If the amount of down payment the bank requires from you is more than you have, this could be a good solution if you can find a co-operative seller.
Financing Alternative #3: 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.
For more information on renting to own, check out the infographic.
Financing Alternative #4: Private Lenders
Another alternative source of financing that you may want to consider is private lending. Technically these are still structured as mortgages, but private lenders often have more relaxed lending guidelines and may be willing to offer you financing when the bank is not.
In this case, you’ll usually need at least 15% as a down payment, and can expect interest rates that are much higher than the posted rates you’d find at a bank. If there is a short term problem keeping you from getting a regular mortgage or a great interest rate, these private lenders could be your best bet.
Financing Alternative #4: Multiple Collateral Mortgages
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.
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. 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.
Financing Alternative #5: 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. 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.
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 today. Take some time to understand your current situation, what you want and need in your next home, and then you’ll be able to make an informed decision on which financing option is best for you.
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.
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