The start of 2018 meant, in Canada, the beginning of government-ordered “stress tests” to institutions that wanted to offer home loans. The end result was an increase in the difficulty for most potential borrowers to qualify for a mortgage. The same is true in 2020.
The price boom throughout much in Canada, particularly in such large cities as Toronto and Vancouver, means that more people who want to buy homes may need to buy a less expensive home or come up with a larger down payment to offset the changes. This rule change made the process less achievable for a good number of Canadians. Given that most banks want a down payment of at least 5% (10% if the home price is $500,000 or more), there was already a fairly high hurdle in many people’s paths, but the “stress tests” that the government instituted made this even more difficult.
There is some logic behind the change. After all, one reason behind the collapse in the mortgage industry south of the border was the fact that many borrowers took out more loans than they could not afford. However, there are many people who have the means to make mortgage payments but who cannot satisfy all of the requirements that the banks and mortgage insurers now have. So this is when people start to look for other means beyond the traditional lenders to provide funding for their homes. This is where the different types of lenders – A, B and private – come into consideration. Take a look at our discussion of each type before you sign on the dotted line, because there is some information that you need to know to keep yourself from a contract that could ruin your credit.
A Lenders Mortgage
These are the traditional lending sources for mortgages – banks, credit unions and other institutions with similar purposes. Their borrowers all have solid credit scores and an income history that is lengthy and more than sufficient. Most people who are thinking about taking a mortgage out start with one of these institutions.
Some of the more common examples of A lenders in Canada include CIBC, BMO, Scotiabank, RBC, National Bank of Canada, TD and Monoline Lenders (MCAP, RMG, Merix to name a few). Because federal regulations apply to these banks, you’ll have to go through the stress tests to qualify. This involves an analysis of your financial situation to see if you could afford to pay the five-year average posted rate of interest or a rate two percentage points above what your bank offers you, whichever number turns out to be higher.
Many credit unions also are considered A lenders, but even though they don’t face federal regulations, they still tend to match the national guidelines, so you could see the same stress tests at those institutions.
B Lenders Mortgage
A B Mortgage is basically any mortgage where the borrower does not meet the criteria for a prime rate. Several Canadian banks offer different mortgage options for B borrowers – those who cannot qualify under the rules set out by an A lender. B Lenders are sometimes referred to as Alt-A (Alternative A Lenders). But these Lenders an also include Mortgage Investment Corporations and Private Lenders. Some Common Alt-A lenders include Home Trust, Equitable Trust, Haventree, Canadian Western Trust, HomeEquity Bank, Eclipse, and some others.
However, these can come with higher interest rates, and you will want to look carefully at the terms and conditions to make sure that the deal is one that can fit within your budget for the short term. Once must be aware that there are some key differences between a B-Lender and a Private Lender.
Private Lenders Canada Can Turn Too When Banks Say NO!
Private individuals and entities that want to invest in mortgage lending can do so with less government regulation. These type lenders are generally high net worth individuals and businesses that specialize in private lending. Many also have designated brokers and brokerages that they work with to assist in underwriting and reviewing application.
As with a B lender, an approval with a private lender can be considerably easier. Private Lender have more flexibility, focus primarily on property the equity, and take a common sense approach to application. There are no “stress tests” or affordability ratios that are set in stone. Some private lenders are also able to use multiple properties to make the financing work or in some cases eliminate the need for a payments duirng the term. Aside from ensuring there is enough equity, the other main focus of a Private Lender is the ability for the loan to be paid off by the end of the term. Paying off in many cases is a Borrower simply improving their situation so that they can refinance with an A or a non-private B-lender. In other cases, it’s to sell a property at the appropriate time. It is also important, though, to pay attention to the terms and conditions so that you are in a manageable situation.
Here are some tips for you to consider if you are considering a B loan or a private loan:
• What is the interest rate?
• Is it interest only or principal and interest?
• What is the penalty for failing to make a payment?
• What is the final payoff?
• What is the penalty if you pay ahead – make a larger payment in a particular month?
• What are the initial up front costs? (Ex. Appraisal)
• What will your actual out-of-pocket cost be each month?
Find a solicitor
There is a great deal of fine print in any mortgage application, so you need to make sure that you understand all of the “fine print” – the provisions of your loan. You also need to know the mortgage rules in each province. It’s a requirement by most private lenders to have you sign with your own lawyer to provide you with Independent Legal Advice (ILA) at the time of final signing.
Amansad Financial underwrites and prepares approval documents for a large network of high net worth backed private lenders across Canada also referred to as our DLGN (Direct Lender Group Network). We focus on consumers that have the means to pay for a mortgage but can’t make it through the labyrinth of regulations yet. Our mortgages are short-term – usually 12 months with the ability to pay off early if able. We want our customers to have a plan in place to refinance or satisfy the mortgage in full at the end of the term. Renewals are always available should the conditions work out, but having that sort of plan is ideal. For us, if an application doesn’t fit our network, we also have access to a wide variety of consumer & broker oriented MICs (Mortgage Investment Corporations) that underwrite in-house that can also assist.
If you are in need of a private mortgage, it is very likely that Amansad Financial can assist and help you bridge yourself from a tough situation to a much better one.
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