What is Alternative Lending?

The most common way to obtain a mortgage is through traditional banks or credit unions. It is common to experience discouragement and frustration when faced with mortgage financing rejections from these traditional institutions. However, if your mortgage situation does not align with these financing options, many alternative options are available to you. These alternatives provide more flexible lending guidelines that may better suit your specific needs. Here are the three types of alternative options:

1. Alt-A lenders: These include banks, trust companies, and monoline lenders. They are large institutional lenders regulated at both the provincial and federal levels. Alt-A lenders offer products with broader qualifying criteria, catering to consumers who require more flexibility to obtain a mortgage.

2. Mortgage Investment Companies (MICs): Similar to Alt-A lenders, MICs are organized under the Income Tax Act. They consist of incorporated lending companies formed by individual shareholder investors pooling their funds to provide mortgage loans. MICs follow individual qualifying criteria and generally offer even greater flexibility in lending guidelines.

3. Private lenders: Typically individual investors. Although sometimes specialized lending companies, these lenders provide funds for mortgages that carry a higher risk of default relative to a borrower’s situation. Private lenders are generally unregulated and tend to cater to individuals with a higher risk profile.

All of the above lender classifications price mortgages based on risk. The broader the qualifying criteria for a particular mortgage contract, the higher the risk assumed by the lender. Consequently, borrowers typically face higher costs in the form of increased interest rates.

Before considering an alternative mortgage, it is crucial to ask yourself the following questions:

• What is currently preventing me from qualifying for a traditional “A” mortgage?
• How long will it take to address this issue and qualify for a mortgage from a traditional lender?
• How much do I need to improve my credit situation or score?
• What is the amount of my available down payment?
• Am I willing to wait until I can qualify for a regular mortgage, or do I need to secure a home quickly?
• Can I sustain this mortgage considering the higher interest rate?
• Can I switch to another lender in the future if the current lender does not renew the mortgage or if I can no longer afford this alternative option?

If you are ready to proceed with an alternative mortgage due to a weaker credit score or a desire to avoid waiting for qualification with a traditional lender, here are additional questions to consider when evaluating alternative mortgage products:

• What is the interest rate? Are there any associated fees, and if so, are they paid from the loan proceeds, added to the loan balance, or paid separately?
• What penalties are imposed for missed mortgage payments? How are these penalties calculated? What are the costs associated with terminating the mortgage agreement?
• Is there a prepayment privilege? For example, can you make higher monthly mortgage payments without incurring penalties?
• What is the cost of each monthly mortgage payment?
• What options are available at the end of the mortgage term? Can you renew the mortgage, and if so, what are the associated costs?
• What does the fine print entail?

When it comes to the alternative lending space, things can become complex. If you are considering an alternative lender, it is advisable to contact your DLC mortgage expert who can help you explore various mortgage products, review rates and terms, and ensure the best fit for your needs.