If you’ve spent some time researching your mortgage options, you may have come across the term “alternative lending.” When you think of Canada’s big banks or other widely known financial institutions, you are likely thinking of traditional lenders. Alternative lenders are lending institutions that have less rigorous mortgage qualifying standards than traditional lenders, and are typically used when you are unable to obtain a mortgage approval from the latter.
For many prospective home buyers, the thought of using an alternative lender can seem a little frightening. You may find yourself wondering:
- Don’t these lenders have extremely high interest rates?
- I have never heard of this company. How can I be sure they are legitimate?
- Will I be stuck in a restrictive contract with impossible terms?
- Aren’t alternative lenders only for those with bad credit?
While it’s true that you will likely pay higher interest rates with alternative lenders, there are many situations in which this type of lending is suited for; it is not just for those who don’t meet the minimum credit score threshold of traditional lenders.
Traditional lenders generally have a set list of requirements that you must meet in order to be approved for a mortgage, and it can be difficult to obtain an approval if you are unable to check off all of their boxes – even if there is an extenuating circumstance. This is where alternative lending comes in, and it while it can be useful for those who struggle with credit issues due to past due bills, collections or a even a past bankruptcy – it can also help those who are self-employed, new to Canada, or individuals who otherwise cannot fit into the traditional lending box.
Instead of checking off a list, alternative lenders will usually evaluate mortgage applications on a case-by-case basis. This means that they are more willing to look at the overall picture and understand why you are not meeting the requirements for traditional lending.
What are the downsides to alternative lending?
In addition to charging higher interest rates (typically 1 to 2 percent higher than traditional lenders), alternative lenders will also generally require a larger down payment on your property. You can expect to pay at least 20 percent down although that number can increase depending on your personal situation and the property in question. There are higher fees associated with alternative lending, and there may be some restrictions on prepayment privileges (which is your ability put extra money towards your mortgage in order to pay it off faster).
Should I use alternative lending or wait until I can qualify with a more traditional lender?
Home buyers generally think of the popular 5-year fixed rate when they are thinking about mortgage terms – however, alternative lending is actually meant to be used as a short-term solution with typical terms ranging from 1 to 3 years. This enables you to become a homeowner now while you work towards being able to qualify for a more traditional mortgage. In fact, a mortgage with an alternative lender can actually help you qualify with a traditional lender sooner as it demonstrates your ability to meet your mortgage payment obligations.
