So it’s time for a mortgage. You call up your mortgage professional to discuss your options, provide all the paperwork they are looking for and then you sit back to await a phone call letting you know that you are good to go. Alas, when you get that call it’s to hear that only a ‘b’ lender is willing to look at your application. Why is that and what in the heck does it mean to you? This week we are going to take a look at just that.
There are four types of lenders in the mortgage world. We will take a quick look at the first two and go more in depth on the others.
1. The ‘big five’, local credit unions and treasury branches – you are all familiar with this first group. There are branches located throughout your community and you will likely see their advertising. These lenders offer mortgages to you based on their pre-set criteria.
2. Monoline lenders – this group of mortgage providers typically source their mortgages through the mortgage broker channel. There are banks, trust companies and other mortgage companies within this group. These lenders are also bound by all the Bank of Canada and OSFI regulations. The funds they lend typically come from the major banks in category 1 and from investors. It can be a great resource to utilize these companies as they often have different lending guidelines which can fit your situation.
3. ‘B’ or subprime lenders – this group of lenders is also comprised of banks and a variety of mortgage providers. There are many reasons that you would go with a lender from this group.
• You may be recently self-employed or are fully commissioned.
• Your credit may be blemished from a divorce, illness or other life situation.
• High debt ratios.
You will need a larger down payment for these lenders. They mitigate the higher risk associated with these applications by requiring you to put more money down. There may also be fees and the rates are generally higher than those offered by the first two groups of lenders. Subprime lenders also ask for documentation not generally required by the other groups.
So should you go with this type of a lender? The answer can be a big yes. Let’s take a look at the groups listed above.
Self-employed – if you have followed your accountant’s advice you have likely paid yourself very little in the way of taxable income. This can be a great strategy for avoiding taxes however when it comes to a mortgage, the lenders now require you to prove you can afford the payments. Subprime lenders are able to take a look at the whole picture to determine income reasonability. It is very important to note that if you do a stated income through a mainstream lender with less than 20% down you will pay a 6% mortgage insurer premium. On a $300,000 purchase that would mean you would pay $16,200. Suddenly the higher interest rate is worth examining to compare which way will cost you less.
Credit issues – most mainstream lenders require a clean two year history on your credit bureau and a full explanation of any credit issues you had before. Subprime lenders are able to look at a much broader scope including those brand new to Canada without documentation, those recently discharged from bankruptcy or those with low credit scores. The maximum loan value for each borrower type is lender dependent.
High debt ratios – subprime lenders generally allow your debt servicing levels to be much higher than the mainstream lenders.
4. Private lenders – this group of lenders is generally sources the funds they lend through a group of private investors. The rates are higher though given the competitive lending landscape they have certainly dropped a lot in the past year. Who would consider these mortgages?
• Those with tax arrears. If you owe money to the Canada Revenue Agency, the provincial government or have property tax arrears, you may have to. The first two groups of lenders will not proceed if you have outstanding taxes and the third it is a case by case situation
• A short term fix – perhaps you need to payout your ex-spouse or business partner. Or maybe you want the funds to payout your taxes or other debts to stop the ceaseless phone calls.
These lenders offer an acceptable short term solution. You will work with your mortgage professional to develop a plan to get you back to the first groups of lenders ASAP.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.