If a leading bank rejects your mortgage application, don’t lose heart. Major banks, or “A lenders,” are not the only loan sources. B and C lenders, also known as private lenders, are willing to lend money to those who couldn’t secure loans from A lenders.
Reasons for Mortgage Rejection
In January 2018, the Canadian government introduced stricter mortgage requirements by implementing a “stress test.” As a result, homebuyers with a 20% down payment also needed to demonstrate their ability to cover specific principal and interest payments if interest rates increased. Consequently, many turned to B and C lenders for mortgage approvals.
Government regulations, economic fluctuations, and interest rates significantly impact mortgage approvals. However, individual circumstances also play a crucial role. A common reason for mortgage rejection is poor or non-existent credit history. Credit scores, which range from 350 (worst) to 900 (best), reflect a person’s financial habits. These scores are determined by factors such as debt payment history, the age of credit accounts, and credit inquiries.
Often, first-time homebuyers suffer from the consequences of their youthful financial mismanagement, like mishandled credit cards or substantial student loan debt. In other cases, no credit history can be an issue because lenders need more information on which to base their decision. Nonetheless, there is still a chance for approval by having a guarantor or co-signer legally responsible for loan payments in case of default.
Another common obstacle is being self-employed, as fluctuating income represents a risk for A lenders who may seek a higher taxable income or larger down payment.
Lastly, those who have declared bankruptcy in recent years are less likely to be approved by major banks and may need to resort to B or private lenders.
Alternative Lending Options
Banks like RBC, TD, CIBC, and significant credit unions may be A lenders, but many other organizations are willing to provide loans. Alternative lenders have a lower entry barrier and charge higher interest rates, processing fees (1-2% of the mortgage), and brokerage fees.
Though major banks and credit unions, known as A lenders, may dominate the lending market, other financial institutions are available to borrowers. If your application was rejected by an A lender, it doesn’t mean you’re left with a shady loan shark holding 30% interest rates. Alternative lenders may have higher interest rates and lower entry barriers but can offer a feasible solution. These lenders often charge a processing fee of 1-2% of the mortgage and a brokerage fee, usually 0.5% of the mortgage.
Utilizing an alternative lender can serve as a temporary solution for many borrowers. They often use it to improve their credit before eventually applying with an A lender.
Canada has numerous banks, including smaller entities like Equitable Bank or B2B Bank, which can provide more client requirements flexibility than larger banks. They might approve a loan for a client with a poor credit history if they have a stable job and no recent bankruptcies. B lenders also take the property under consideration to offset any default risk.
There’s no need to worry about B lenders, as they are reputable organizations, often listed on stock exchanges, with millions of clients worldwide. They’re also approved by the Canadian Mortgage and Housing Company as mortgage lenders.
C Lenders (Private Lenders)
Private lenders step in as a last resort when B lenders have rejected an application. Often, wealthy individuals or groups and private lenders offer their own money for better returns. Since they assume more risk, they charge higher interest rates, ranging from 10-to-18% or more.
C lenders have a lower entry barrier for mortgages compared to B lenders. Instead of basing decisions only on credit scores and occupations, they emphasize property type and value. For refinanced homes, they consider existing equity in the property.
When obtaining these mortgages, the requirements for entry are less stringent than those of B lenders. Instead of solely relying on credit scores and occupations for mortgage approval, private lenders place greater importance on the property type and its value. Furthermore, when refinancing a home, they consider the equity you already possess. While other lenders do consider the property itself, private lenders place a higher emphasis on this aspect.
Additionally, it is advisable to have an attorney carefully review any related documents.
Acquiring a subprime mortgage
The phrase “subprime mortgage” shouldn’t immediately evoke the 2008 financial crisis. In reality, subprime mortgages are a normal part of life, referring to loans provided to individuals with poor credit ratings. Mortgages from B and C lenders typically fall into the subprime category.
If you decide to pursue a subprime mortgage, where do you begin? Unlike A lenders, B and C lenders may not have physical locations on every street corner. Rather than searching for the best rate on each B-lender’s website, contacting a mortgage specialist might be more efficient.
Mortgage brokerage or freelance mortgage specialists help homebuyers navigate the alternative lending market. They can access multiple lenders and their mortgage rates and even negotiate a lower rate for you. With their expertise, they can also find the most suitable lender for your situation. However, they take a percentage of your total mortgage as a commission, which can motivate them to approve you for a mortgage you shouldn’t be approved for.
Online mortgage brokers are also famous for scouring the B-and-C lender landscapes. These brokers cut margins by operating online and passing the savings on to their customers. Using technology, they can determine who the best lender is for you. If you’ve been denied by a central bank for your dream mortgage, there’s still hope. Though it may cost a bit more in terms of interest, it’s only temporary until you get your credit back on its feet. B and C lenders can help you get closer to your dream home.