Besides the stress test, Credit can disqualify you from a mortgage

In a more case-by-case scenario, a common factor for mortgage rejection is poor or no credit history. A credit score is a number on a scale of 350-900, where 350 is bad and 900 is stellar, which explains a person’s ability to pay off their debts or their debt utilization rate (let’s say you have $10 000 of credit available but have only used $1000. You have a 10% credit utilization ate – the lower the rate, the better the credit score). In addition to your history of paying off debt and credit utilization rate, the score looks at how long you have had a credit account, new inquiries for credit, and other factors.

Quite frequently, first-time homebuyers run into issues with their credit score. This could have been a mismanaged credit card or high student loan debts, which would have resulted in a terrible credit score. Another issue is if the person has never had credit. This would result in no credit history that the lender could rely on.

There is hope, however. Even with a bad or missing credit history, individuals can still get approved if they have a guarantor or co-signer. This is someone legally liable for your loan payments if you default. For many first-time homebuyers, a co-signor or guarantor is a family member.

Self-employment is another common way people find themselves unable to approve their mortgage applications. Due to the instability of their income, A lenders find self-employed people a greater risk. Thus, the bank may require a higher taxable income or a larger down payment to approve someone self-employed.

Lastly, life is full of twists and turns, and many people make financial mistakes; this can result in bankruptcy. People who have declared bankruptcy in the past few years won’t get approved by any major bank and will have to seek help from a B or private lender.

The alternatives

While A lenders consist of the major banks (RBC, TD, CIBC and Scotiabank) and the major credit unions (Meridian, Vancity and more), there are many more organizations willing to lend money. However, just because an A lender has declined you doesn’t mean your only option is to take a stroll to a dark alleyway and find a loan shark that charges a 50% interest rate. That’s where B and C Lenders come in: alternative lenders have a lower barrier to entry in exchange for a higher interest rate. They also commonly charge a processing fee of 1-2% of the mortgage and a brokerage fee, usually 0.5% of the mortgage.

It should be noted that using a B or C lender often is not a permanent fix. The mortgage terms tend to be shorter, up to 5 years. Many borrowers use an alternative lender to rebuild their credit and then switch to a mortgage with an A lender later on.

B Lenders

Contrary to what one might think, there are dozens of banks in Canada. Many of these smaller banks, such as Equitable Banks or B2B Bank, allow clients to miss one or more of the components that the big banks look for in a client. For example, they may approve someone even though they have a poor credit history if the applicant has a stable job and no recent bankruptcies. B lenders also more heavily consider the property being purchased in offsetting default risk.

B lenders can also be found at the Big Banks. With Canada’s housing industry roaring over the past couple of years, the major banks have diversified, and their mortgage departments often feature B level lending arrangements.

There is no need to fear B lenders. B lenders are still reliable organizations, commonly listed on the stock exchange, and have many clients worldwide. While banks dominate the mortgage market at approximately 71% of the market and credit unions at 15% of the market, the other 15% or so of the market are B or C lenders. The Canadian Mortgage and Housing Company also approve them as a mortgage lender.

C Lenders (Private lenders)

After both A and B lenders have turned you down, private lenders are usually the last resort. These lenders are often wealthy individuals or a group of individuals who lend out their own money for a better return, such as Mortgage Investment Entities (which can also be B lenders). However, as private lenders take on an even riskier clientele than their B-lending counterparts, they also charge a higher interest rate. As a result, you can expect interest rates anywhere between 10-to-18% and even more.

The barriers to entry for these mortgages are lower than that of B lenders. Instead of approving a mortgage only on credit scores and occupations, a private lender weighs more emphasis on the property type and value. If you are refinancing a home, they also consider the amount of equity you already have. This is not to say that other lenders don’t consider the property itself, but private lenders care more about it. It is the type of property that lenders seek to buy, and their high-interest rates that reduce the risk that C Lenders hold.

Lastly, because you may not be dealing with a massive and trustworthy corporation in the private lending landscape, it is best to have a lawyer thoroughly look over any documentation.

How to get a subprime mortgage: B and C Lenders

The term “subprime mortgage” should not give you a flashback to the 2008 recession. Subprime mortgages are realistically a part of everyday life and refer to any loan granted to those with a poor credit score. The mortgages provided by B and C lenders are usually subprime mortgages.

So if you’ve decided to get one, where should you start? Unlike A lenders, B and C lenders do not have a brick-and-mortar stores at the corners of every major intersection. And while you could scour the websites of every B-lender bank looking for the best rate, it may be more efficient to contact a mortgage specialist.

Mortgage brokerages or freelance mortgage specialists help homebuyers navigate the alternative lending market. They have access to multiple lenders and their mortgage rates, and they can 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 now also a popular method to scour the B-and-C lender landscapes. These brokers cut margins by operating online and passing the savings onto their customers. Using technology, they can find out who the best lender is for you.

If a major bank has denied your dream mortgage, there’s still hope. Though it may cost a bit more in terms of interest, you can use B and C lenders as a temporary stepping stone you get your credit back on its feet. B and C lenders can help you get one step further to do what you thought was previously impossible.

The post The Ultimate Guide to B and C Lenders: Mortgages beyond the Big Banks first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

What are A Lenders?

A Lenders, for the most part, are the most prominent financial institutions in Canada that (as part of their many services) are in the business of giving people loans to buy houses. Even if you can’t define A Lenders, you know what they are. They are the largest banks in Canada: Bank of Montreal, CIBC, RBC, TD Bank, National Bank of Canada, and Scotiabank. They are also the largest credit unions in Canada: Vancity, Meridian Credit Union, Desjardins and more.

What makes these lenders rank A is their reputation and demand. When people are looking for a mortgage, the big banks, and to a lesser extent, the big credit unions, are who people go to. Part of that is a feedback loop, as people go to them because they have the capital to do business with a lot of people, partly in turn because so many people go to them.

What also makes them A Lenders is that they are also compliant with the federally mandated Mortgage Stress Test. Even if you don’t need mortgage loan insurance, you must pass the stress test to get a mortgage with an A Lender. To pass the stress test, you need to pass the minimum qualifying, which is the higher of 5.25%, or the rate offered by your lender plus 2%.

Banks are compliant with the stress test because the federal government regulates them. Credit Unions and Caisses Populaires technically do not have to comply with the stress test, as they are regulated by the provinces and not the federal government. However, the large credit unions, A lenders, comply with the stress test by choice. Aside from those seeking a mortgage, you also need to pass the stress test if you already have a mortgage but want to refinance your home, switch to a new lender or take out a home equity line of credit. The Mortgage Qualifier Tool is useful for those wondering whether they qualify for a mortgage from an A Lender.

In short, A Lenders get the rank of A because of their reputation, their capacity to give loans, and the fact they are compliant with the mortgage stress test. They have more red tape to get through – but less risk. If you get a mortgage from an A Lender, you are a “prime borrower.” Things are a bit different for B Lenders.

What are B Lenders?

B Lenders get the rank of B because they are often people’s second choice when they do not qualify for a mortgage from an A Lender. B Lenders typically provide mortgages to people who would not be eligible for an A Lender mortgage because of their income or credit score. B Lenders generally are Credit Unions of Caisse Populaires that do not follow the stress test and Mortgage Finance companies.

For many people, personal circumstances may make getting a mortgage from an A Lender difficult or even impossible. This doesn’t mean that those people are financially irresponsible: life is far more complicated than that. With the Canadian real estate market, those people may have the resources to afford a home, just not under the requirements from A Lenders. B Lenders are not giving out mortgages like free samples at Costco, but they have less stringent requirements than A lenders. For example, most banks, at a minimum, require a credit score of 600 (if not more) to approve people for a mortgage. B Lenders are more willing to give mortgages to those with credit scores below 650. Through the mortgage, they also allow borrowers to build their credit score. Asides from credit scores, B Lenders are more willing to provide mortgages to those with different types of income (A Lenders usually look for a steady, guaranteed income, making things more difficult for the self-employed), those with higher debt ratios or those who have been previously bankrupt.

Of course, because B Lenders are providing mortgages to those who would be considered higher risk (from a lender’s perspective), their interest rates tend to be higher, usually up to 2% compared to A Lenders. They also require a higher down payment than the typical 5%, generally at least 20%. Mortgages from B Lenders may also have higher closing costs. For many people, a B Lender may be an excellent option for those who are refinancing and want to switch from an A Lender to a B Lender.

How to find B Lenders?

Overall, the advantage of a mortgage from a B Lender is that they are more lenient to those who have a poor credit history or non-traditional sources of income. However, the disadvantages are higher down payments and interest rates. One other drawback to B Lenders is that because they are not as well-known as the banks, it can be harder to find more information. However, that’s where the right mortgage broker can provide immense value and find you a suitable B Lender for your situation.

However, beyond seeking a mortgage broker for help, B Lenders are also more common than you think. For instance, A Lenders may also have B Lender Divisions – so if you have a current mortgage at your bank or credit union, you may be able to find a B mortgage at the same institution. Banks dominate the market share of mortgages at 79% of the market, and Credit Unions and Caisses Populaires come in at second at 14% – a decent amount of those institutions have B Lender divisions. At 5%, the third-largest type of mortgage lender is Mortgage Finance Companies, Insurance and Trust Companies, followed by Mortgage Investment Entities at 2%. These institutions are the prototypical B Lender. So yes, B Lenders aren’t on every corner like a CIBC, but they exist, and depending on your situation, it might be worth a look.

The post How do I get the best mortgage rate? The Ultimate Guide to A Lenders vs B Lenders first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.