Since the introduction of the mortgage stress test a year and a half ago, alternative lenders have been dramatically increasing their market share. The stress test has made it more difficult for borrowers to qualify and this has forced borrowers to turn to other options.
Alternative lenders encompass a variety of lenders. They include “B” lenders that offer rates at 1% – 2% higher than the banks as well as “C” or private lenders that typically offer rates starting in the 6% – 7% range.
The “B” lenders will typically help borrowers in several different scenarios. This includes self-employed borrowers who do not declare enough income to qualify. Often times paying a slightly higher rate on a mortgage works out better financially than declaring higher income for better rates and paying more income taxes. They will also help people who have some damage to their credit which inhibits them from qualifying for a mortgage. You typically need 20% – 25% down to qualify for this type of mortgage.
The “C” or private lenders are usually just equity based lenders. This means they don’t take a close look at income and they will lend on damaged credit. They mainly look to see how much equity you have in the property and are relying on that to lend you the money. Typically you need 20% – 25% down for this type of mortgage as well. The rates on these mortgages will vary depending on how much equity you have and what your credit is rating is like. The less equity you have and the lower the credit score the higher your rate will be.
Essentially these alternative lenders will give more options to people with less verifiable income or damaged credit than the banks will however the equity/down payment needs to be a minimum of 20%.
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