02 May Alternative Lending
In a previous post, we talked about the difference between A and B lenders, as well as private mortgage lenders. (Read here). Many of our clients have inquired if these were the only options to alternative financing. Well, there are a few other options.
If you recall, the introduction of the stress test (which we talk about in other posts) brought a few complications for aspiring homebuyers, as it made things a bit more challenging to get mortgages approved. This is in part due to the fact that banks and other prime lenders often need to follow strict rules to lend money, especially if people have a small down payment, a poor credit score and/or a low net worth.
The alternative way
With the above situation came the need to “look elsewhere”. This is where the alternative lending comes in. What makes a financial institution such as a bank deny a mortgage application? Several factors: credit scores and history, employment records, gross monthly income, net worth, debt history, among other things. You should also familiarize yourself with collateral and bridge loans.
So, private lenders are one alternative. As we said, check our post on this. Another alternative is the seller financing. Though challenging to setup, it may be a possibility if you can negotiate it. Essentially, as the term indicates, the person selling the house finances the purchase, rather than a financial institution proving a mortgage to the buyer. This is why it can be challenging, as the arrangements are made between the buyer and the seller. This is done through the means of a promissory note setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Don’t forget you still need to find a first mortgage lender to allow for this arrangement.
Another alternative is the “Rent to Own” option. Head to our Youtube channel to see the video on this topic. However, very briefly, this option consists of the prospect homebuyer getting into the home of their dreams without having to worry to qualify for a mortgage. Basically, this program is similar to a long term lease on a house with the option to purchase the home at a pre-determined price. The idea is that you can get into a home of your own today and then exercise your option to purchase once you are in a position to qualify for a traditional mortgage.
If you are considering alternative lending, then you should consider these options. Talk to us about them.