Buying or Selling your House in Western Newfoundland and Labrador

What Is An Alternative Lender and Why You Might Need One

August 9th, 2023
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Is it getting harder to be approved for a mortgage? 

The Bank of Canada (BoC) keeps raising interest rates, and this is having a spillover effect on the mortgage market, meaning borrowers are paying more or being refused mortgages altogether. 

The conventional five-year mortgage lending rate is inching closer to six percent again. This also means that the mortgage stress test, which determines if you qualify for a home mortgage based on income and expenses, is getting harder to pass since it is the interest rate plus two per cent. So, for example, if the national average price for a home is $700,000, and you are making the national median gross income of $67,000, you will be denied a mortgage. 

In separate situations, when real estate prices are lower in other markets, applicants might still see their applications rejected because of inadequate down payments or high interest rates. 

As a result, the current environment has forced households to look outside the conventional banking system to achieve the long-term objective of homeownership. Where are they going? Alternative mortgage lenders. 

But what are alternative mortgage lenders anyway? Let’s take a deeper dive. 

What is an Alternative Mortgage Lender?

Alternative mortgage lenders are financial institutions offering mortgage loans outside the conventional banking system. They serve as substitutes for traditional banks and credit unions, allowing individuals, whether they are self-employed applicants or borrowers with poor credit scores, who might not qualify for a loan. These entities might assess other factors that conventional lenders would, such as future income potential, the borrower’s assets, and the property value. The application process is fast, and the funding is transferred quickly too. 

Advantages of Alternative Mortgage Lenders

So, what are the advantages of using alternative mortgage lenders? Here are three benefits: 

#1 Flexibility 

One of the benefits of alternative mortgage lenders is that they are flexible when approving home loans. By broadening their qualifications, they can expand the list of borrowers who may not normally meet the criteria of traditional banks. 

#2 Personal Finance 

An attractive facet of alternative mortgage lenders is that they will work with borrowers in unique financial situations. Self-employed folks, for example, might have unstable incomes. Or, as another instance, borrowers may have unconventional income sources but have enough to service a mortgage. 

#3 Speed 

By applying for a mortgage with a big bank, be prepared to wait a while. However, with alternative lenders, the application process is much faster, meaning you can choose to move ahead on a house or condominium that suits your needs. 

#4 Housing Market 

Amidst the once-in-a-century pandemic, the Canadian real estate market witnessed an unprecedented surge, thanks to the Bank of Canada (BoC) slashing interest rates to nearly zero. Numerous individuals capitalized on this lucrative opportunity by applying for mortgages to acquire residential properties. Although some applicants may have faced delays or insufficient income, alternative lenders provided viable options to leverage current market trends and maximize low interest rates and capital appreciation. 

Risks of Using an Alternative Mortgage Lender

So, what are the risks of utilizing alternative mortgage lenders? Here are three challenges: 

#1 Interest Rates 

Alternative mortgage lenders, which are taking on more risk than conventional banks, will charge higher interest rates on their loans. So, borrowers will inevitably pay a great deal more to purchase a home. 

#2 Fees 

In addition to higher mortgage rates, these alternative organizations might add more fees and other costs to the overall expense of the loan. This is why it is critical to review the fine print and determine what these additional costs are, be it origination fees or pre-payment penalties. 

#3 Predatory Practices 

Some alternative mortgage lenders have been accused of participating in predatory practices. This is when some firms will take advantage of desperate borrowers and employ odious tactics to ensure prospective homeowners, who might not have the means to buy a property, are given a massive loan. 

#4 Regulations 

Unlike the larger financial institutions, the alternative mortgage lending market is not as regulated or monitored by the government. Put simply, there is a lack of oversight, meaning fewer consumer protections exist. This will require borrowers to do their due diligence by studying the company’s compliance, legitimacy, and reputation. 

Are You Sure?

Before you decide to use the services alternative mortgage lenders offer, consider all the angles. This could consist of determining if you can afford to make the most significant purchasing decision of your lifetime. This could include reviewing these alternative lenders. Whatever the case may be, be sure to crunch the numbers, check the web, and ask the right questions before choosing to use an alternative lender.  

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