As we all know, mortgage financing is not as easy to attain as it was even a few years ago before the stress test was introduced in October of 2016. This is why alternative lenders, also known as B lenders have significantly grown in popularity. These lenders can stretch the criteria for approval which otherwise would deem you incapable of approving for a mortgage. For example, you have a great income and you've saved up over 20% down payment, but you've had a few hiccups with your credit cards... your credit isn't the greatest and your beacon score has fallen under 600. At this beacon score, the Big 5 Banks as well prime lenders, otherwise known as A lenders will disqualify you for mortgage financing. Same holds true if your income is too low to sustain your mortgage or if you have too many debts to pass the affordability test. This is where alternative lending provides opportunities that allow may to break into their home purchase where it was thought not possible.
Although alternative lending is an excellent solution for many, it should be treated as a short-term strategy. Most B lenders will set your mortgage on a 1 or 2 year term where it is recommended that you work on improving the variables that are holding you back, like credit or income during that time. Where’s the catch you ask? Well, these type of mortgages usually come with a 1% setup fee and the interest rate is usually about 1% or 2% higher compared to the markets best rates. This might seem like a lot, but it’s really a small price to pay if you are breaking into the market and have little options.
Exit Strategy
Great, you were approved for a mortgage with an alternative lender! It’s not time to celebrate, it’s time for a plan. What can you improve over the term of your mortgage to get approved with a prime lender come renewal time in 1 or 2 years? Is it your credit that’s holding you back? Talk with your mortgage professional or a financial adviser about ways to improve your credit as quickly as possible. It may not be as tough as you thought. Do you have too many debts? Maybe it’s time for a budget and a re-payment plan. Always plan your exit strategy with the goals of attaining a mortgage with an A lender.
Most importantly, always talk with a professional that can help you reach your goals. But make sure to pick someone you trust. I’m always available, even if it’s just a conversation about your financial goals and future.