The Truth about Alternative Mortgage Lenders
Some members of the media have gone overboard painting a dark and dour picture of alternative mortgage lenders. The impression they give is that a bank mortgage is lily-white-extra-virgin-be-all-and-end-all, and anything else is inferior — and perhaps unsavoury.
We hear terms like shadow lending, sub-prime lending, private lending, alternative lending, etc., and it’s not hard to find an industry insider who will happily provide a spooky sound bite.
For example, a recent article in The Toronto Star, talking about declining real estate values in Toronto, took a shot at alternative lenders stating:
“The problem has been compounded by new mortgage rules that they believe have the potential to drive desperate buyers deeper in debt by sending them to alternative lenders that offer higher-interest loans.”
That’s kinda silly really; and just plain wrong.
If a mortgage applicant is a strong alternative mortgage candidate, she may be offered a rate as low as 3.89%. That is HARDLY driving her deeper into debt and in fact is competitive with current “A lender” rates.
I will break it down for you. For most residential mortgage needs, there are just three types of lenders.
There are “A” lenders, private lenders and alternative lenders.
“A” Mortgage Lenders
Chartered Banks, Credit Unions, Monoline Mortgage Lenders
If you can fit into an “A” lender’s lending guidelines, you happily do so. You will normally enjoy the lowest interest rates and usually no fees associated with the mortgage unless it’s hi-ratio — in which case you pay the CMHC insurance premium. Here’s an article where I explain hi-ratio and loan to value.
Within the group of “A” lenders there are three primary types:
- CHARTERED BANKS: they know who you are; their approval process seems less demanding. But they do have to comply with the new mortgage stress guidelines, and they don’t often have solutions for self-employed business people. A particular concern; their prepayment penalties are typically very high. Which matters when so many five year mortgages never actually make it to full term.
- CREDIT UNIONS: the same benefits as the chartered banks, and a couple more. Some don’t use the stress test when underwriting non-insured mortgages AND they can be very practical when it comes to commissioned salespeople and other self-employed folks.
- MONOLINE MORTGAGE LENDERS: unlike banks and credit unions who have many different credit and loan products, these lenders only focus on mortgages — hence MONOLINE (mono means one in Latin).
They will not serve you with bricks and mortar branches — your dealings will all be by phone, fax and online.
They also must use the mortgage stress test for all their mortgage offerings. One big advantage of monoline lenders is their prepayment penalty to break a fixed rate mortgage is usually much less than the banks and credit unions.
Examples of monoline lenders include MCAP, Merix, First National Financial, and RMG Mortgages
There are also some trust companies and insurance company spin-offs offering mortgage products.
Private Mortgage Lenders
At the other end of the spectrum, there are mortgage investment companies and even wealthy individuals who are willing to lend their money when no one else will.
They serve a valuable and necessary role in the marketplace. They will typically have the highest interest rates and fees, but they will often solve insoluble problems. They do not offer hi-ratio insured mortgage solutions.
Private lenders care mostly about your property since if you renege on the loan and they have to commence power of sale processes, they want to know they can get their money out quickly.
Some of the biggest names in this space in Canada are Fisgard Capital Corporation, Alta West Capital, and VWR Capital Corp. But you could even get a private mortgage from your lawyer, your neighbour, your real estate agent, a family member, your mortgage broker — in fact, anyone who is willing to take the risk.
If you find yourself in private mortgage discussions, make sure you retain an experienced real estate lawyer and a reputable mortgage broker who is licensed and held to regulatory standards by The Financial Services Commission of Ontario (FSCO – or the equivalent to FSCO in your province)
Alternative Mortgage Lenders
Also called “B” Lenders
When your mortgage needs are not quite ready for prime time – “A” lender territory – and your covenant is so strong that a private mortgage is not necessary.
These lenders are not offering you hi-ratio, insured mortgages. So whether you are purchasing or refinancing your property, you will need at least a 20% down payment.
These are companies like B2B Bank, XMC Mortgage Corporation, Equitable Bank, Home Trust Company, Lendwise NPX, Street Capital Solutions, Optimum Mortgages, MCAP Eclipse, RMG Eclipse, Bridgewater Bank, Effort Trust, IC Savings, First National Excalibar, and Community Trust.
Most of these lenders, in fact, have mortgage products catering to “A type” clients too. They are all reputable companies doing business with integrity. They are regulated, and they are good. In fact, the alternative mortgage sector is the fastest growing segment of the Canadian Mortgage Industry.
Private lenders and alternative lenders do not lend in every province; your mortgage broker will match up your application to the most suitable lenders.
Alternative lenders will usually charge you a one-time lender fee, and their rates can be a touch higher than “A” lender interest rates. They are sourced by a mortgage broker, who may charge you a one-time brokerage fee.
Here are a couple of client situations we’ve successfully resolved with the help of private and alternative lenders…
CASE STUDY #1: Private second mortgage kept pensioner in her home
Lara came to us late last year with over $75,000 in unsecured debts. She owns her own condo; but since she first bought it, she has since retired from work, and relies solely on her government pension and OAS for income.
As a result, she finds herself dipping into her available credit facilities to supplement her income.
Unfortunately, once balances develop on your credit cards, they become a beast which needs to be fed each month as a result of high-interest charges and minimum monthly payments.
It often happens that people who start down this path need to tap into their other credit lines to service the credit they have begun to use. Like a forest fire started with a small spark, the compounding effect can be quick and dramatic.
After two or three years of this, Lara was at her wits’ end. $75,000 in debt was choking her — the minimum monthly payment over $2,000!!
She could not keep this up any longer.
By the way, Lara actually has an excellent personal credit history. She has never had a late payment; so notwithstanding high balances, her score is respectable. She was wondering if a consumer proposal was the right solution for her situation.
But the answer to that question is NO.
The reason is her first mortgage is relatively small, and she has almost $300,000 equity in her home.
A trustee assessing her circumstances could not offer her a consumer proposal as an alternative because she has a husky net worth, and is by no means insolvent.
How to solve Lara’s debt problem
The obvious solution is to sell her condo, pay off her debts, and either rent a property or buy a cheaper, smaller one.
Not surprisingly, Lara was very much against this.
She argues the monthly rent on a similar condo apartment would be far higher than she currently spends on mortgage, maintenance and property taxes. AND her rent payment would be helping her landlord pay off THEIR mortgage, not hers.
She wanted to avoid downsizing too — because she would be faced with real estate commissions on the sale of her condo, as well as land transfer taxes on the new condo. There may not be enough left over to pay off all her debts.
So… how did we keep Lara in her home AND rid her of the beastly debt?
The ASKROSS solution
Re-mortgage Lara’s home to eliminate all her debts.
We decided to leave her current first mortgage intact — it will mature at the end of June 2019 – in one and half years. This way, there is no prepayment penalty AND no increase to her monthly mortgage payment.
Instead, we arranged a special private mortgage for Lara – tailored to mature on the exact same date as her first mortgage. At that time, she can seamlessly combine both mortgages into one new one.
We knew cash flow is a concern for Lara, so this mortgage was structured so there is NO MONTHLY PAYMENT.
We made the mortgage loan amount large enough so that Lara can prepay the entire interest obligation right at day one. In fact, the mortgage covered ALL COSTS AND FEES. The net result being:
- $75,000 of unsecured debts paid in full. No credit facilities were closed — she still has them if she needs them in the future
- No more minimum monthly credit payments over $2,000
- Her first mortgage payment remained unchanged
- She has NO MONTHLY PAYMENT on the new second mortgage
Lara will be able to live debt free once again, and in fact, can start to save money each month. Most importantly, she gets to keep her home and not sell it off to rent and pay someone else’s mortgage.
CASE STUDY #2: Very Bad Credit and Self Employed Qualify for Mortgage
Yesterday’s midday appointment arrived in despair. He has been working with his bank, and various other “connections” to secure a mortgage on a new condo he is buying in two months. So far, everyone has declined him, even though he can put up a $100,000 down payment on a purchase price of only $360,000.
Why? Well, he was discharged from bankruptcy eight years ago but never got around to re-establishing his credit history since then. In fact, his credit report still shows an outstanding debt to Rogers from years ago. So his credit score is WAY below acceptable.
Second, he does not have a regular job, but rather is self-employed. There are lenders who are fine with that, but they do require you to be current in your income tax filings, however. This guy has not filed in the past two years – so that’s another strike.
Third, some bright spark suggested all his troubles would disappear if he simply faked an employment situation on his mortgage application. There is a small cottage industry out there which exists to “find people jobs” when they need them for credit or mortgage applications.
So, feeling desperate, my guy agreed. He paid several hundred dollars for his fake job, his application was resubmitted to a new lender, and he was approved for a respectable mortgage with a rate of 4.99%.
This all fell apart quickly. (a) The computerized pay stubs he was required to produce to the lender misspelled his name (!) and (b) whenever the lender called “his employer” to confirm his employment, he was never at his desk (of course!)
The lender quickly grew tired of this and killed the deal. Crime does not pay.
As a mortgage broker agent, we occasionally see people like this. People who have totally destroyed their application with various unsuccessful efforts, then they come to us expecting a miracle. Meanwhile, all the stuff they submitted before has been entered into and retained by various lender computer systems.
However, there is a solution – private money. There are many individuals out there who will lend their money for mortgage transactions, the loan secured by the underlying property. In fact, this market is growing markedly – with all the tough changes to mortgage rules in the past few years
I first had to show him the error of his ways – and to bring him back from “the dark side of credit.”
The deal came together pretty quickly. He will get a one-year open mortgage at 7% interest. He will pay interest only each month on this mortgage – so his payments will be manageable.
For sure, there are significant additional expenses to be incurred which he would not otherwise have – a lender fee, a broker fee, legal fees for the client AND the lender. Such expenses are the norm with private lending – (first or second mortgages)
But this is pretty much the only way he can close this deal – and anyway, he can include those expenses inside his new mortgage.
Concurrently, we will clean up his Rogers debt; re-establish his credit history with a couple of small credit cards; and get him up to date with his income tax filings.
There is an excellent chance that within one year, we can take this client back to an institutional lender and write up a more traditional mortgage at a far lower interest rate. And if his file is still not quite up to par at that time, then we can simply renew the private mortgage for one year.
From despair to a solution – that works!
Closing Thoughts on Alternative & Private Mortgage Lenders
They are mostly good honest people working to help you mortgage your home; whether you are dealing with “A” lenders, private lenders, or alternative lenders. In any business, there are a few bad apples.
If you are being presented with a private or alternative mortgage solution, ensure your mortgage broker has experience and comfort in this arena — not all do. And ask if this is a temporary phase you are going through or if this is, in fact, the world you now live in.
Ask for an estimate of the total cost of the solution your broker is sourcing for you. There should not be any last minute surprises when the final offer comes in. Understand how much you must pay and when, and whether or not expenses are coming from your pocket or the mortgage proceeds. Ask lots of questions, feel free to get a second opinion, and rely heavily on an experienced real estate lawyer.
Here’s how a typical alternative mortgage offer would work:
- The term offered will usually be one or two years, occasionally three years
- Thirty-year amortizations are normal, and in fact, a couple will allow 35 years with a modest rate increase
- They are much more open-minded about non-conventional income sources
- They are willing to work with people with blemished personal credit histories
- They also must apply the mortgage stress test when underwriting your mortgage, BUT they will work with higher debt service ratios than the A lenders will; it’s not uncommon to go up to 48% or even 50% Total Debt Service Ratio. (TDS)
- Most of them like to collect your property taxes with your mortgage payment
- Most of them charge a modest renewal fee, and some charge an annual maintenance or administration fee (a few hundred dollars)
FIVE EXAMPLES OF ALTERNATIVE MORTGAGE CLIENT SITUATIONS
- A recent bankruptcy, consumer proposal or debt restructuring
- Recent history of late payments and low personal credit score
- A judgment or lien registered against their home
- Hard to verify income — for example, contractors, salon workers, consultants, commission income, truck drivers, etc.
- Look like “A lender” clients, but their income is not high enough to qualify with the mortgage stress test
There are even lenders who specialize in agriculturally zoned properties; construction financing and blanket mortgages (a mortgage covering more than one property).
Also, both Equitable Bank and Home Trust Company offer HELOC/Visa type products which are terrific for clients who need a secured line of credit but do not qualify via conventional means.
Although I’m local to Toronto, I arrange private second mortgages across Canada on a regular basis. I feel private mortgages can be an excellent tool to solve a specific problem. Hopefully, I’ve convinced you that not all alternative and private mortgages are evil and quite the opposite, can be a great help in a time of need.
If you’re facing financing difficulty and need help with a new mortgage or access to private money to solve your debt problems, I can help. Get in touch today for a free consultation.