It’s been seven months since new mortgage qualification rules, in the form of Guideline B-20, came into effect in Canada. Under these new rules, put in place by the national banking regulator to reduce risky lending practices, mortgage applicants paying less than 20% down must prove they can continue to carry their mortgage payments at the Bank of Canada’s conventional five-year mortgage rate (currently 5.34%). Those paying more than 20% down must also prove they can carry their payments at this rate, or at their contract rate plus 2% – whichever is higher.
These new requirements have inevitably put greater pressure on today’s mortgage borrower, and have even caused some to no longer qualify for a mortgage with the same financial criteria that would have qualified them last year. In fact, mortgage experts predicted roughly 10% of prospective buyers would be removed from the market as a result of B-20.
So, if you’re one of those denied mortgage applicants – what choice do you have to qualify for a mortgage?
Related Read: 52% of Canadians Support Mortgage Stress Test
When A-Lenders Are No Longer an Option
Let’s say, theoretically, you have a decent down payment, but were declined by your bank without a clear explanation from your advisor as to why you were turned down. You may have then turned to a mortgage broker to explore better rate options and a variety of lenders – but are then told that, even with a broker’s assistance, you still don’t qualify.
There is typically an extenuating circumstance behind for your denial: for example, if you are a new Canadian, your income is too low, or your credit report has been tarnished by any number of past issues, including late payments or even a consumer proposal. As well, those recuperating financially from a family member’s illness, loss of a loved one, messy divorce, or even identity fraud, may find it challenging to qualify for A rates based on their compromised financial scenario.
Or perhaps you’re simply self-employed; your banker may only allow you to use your net income to qualify your home purchase, despite the fact you have plenty of write-offs, and know you can comfortably purchase or refinance a home.
At this point, you may have been offered mortgage financing at a “B” or even “private” lender. This seems like great news – but how should you proceed? It’s important to note that you likely can find mortgage financing for the amount you require, but it’s important to be aware! These higher-risk loans come with extra fees, higher rates and monthly payments, shorter terms, and little patience from the lender should you miss, or are late with, a payment.
This is where most people will stop reading as they really didn’t want their desired home that badly, and would prefer to fix the financial mess they’re in before purchasing a home. But if you are still interested in getting a mortgage for your home and want more information – read on!
The Difference Between a B-Lender and Private Lender
To differentiate between a B-lender and a private lender it basically boils down to your rate, your ‘lender’, and your fees. Both will have a lender fee (sometimes called a ‘governmental’ fee). Both will have strict rules. Both are happy to help you out in your time of need.
A B-lender is a lending institution that will lend to folks with bruised credit, or with mortgage lending ratios that are slightly higher than what an “A-lender” could approve due to underwriting and government rules and regulations. Often, many A-lenders will typically have a B-lender available for a short-term fix to then get you back to the A-side after a year or so.
With a B-lender:
- rates today are anywhere between 3.69% to 5%+ depending on the severity of the situation
- lender fees are 1% up to 3%+
- mortgage brokers may also charge a broker fee for their work
- terms are usually between 1 to 3 years
- properties typically within the GTA or major city area
- minimum is 15% down payment from your own sources (you will need to get a ‘private’ 5% down payment – could be 10% to 12.99%), must qualify with those added payments
- additional personal income information will be required
- lending ratios are used to qualify a borrower
Private lenders are equity lenders who are typically individual investors, or a pool of investors, looking to provide mortgages or loans for a short term. These types of financing are available to those who will not qualify for A or B lenders and are considered very risky, but can be used as a short term fix for a tough personal financial situation. DO NOT miss your payments to a private lender, as your fees will climb and you can lose your home pretty quickly!
With a private lender:
- rates today are anywhere between 7.99% to 12.99%+
- first, second, and even third mortgage financing is available but at a higher cost
- your down payment/ equity must be at least 20% in the GTA
- up to 35% and even 50%+ depending on property location and severity of your current financial situation
- you are responsible for the cost of a property appraisal from the lender’s approved appraiser
- you may be responsible to pay the lender’s legal fees in addition to your own legal fees
- lender fees can usually start at 2% and go up
- mortgage brokers may also charge a broker fee for their work
- minimal personal financial information is required
- lending ratios are typically not considered to qualify a borrower
Explore Your Options to Qualify for a Mortgage
It’s always a great idea to contact a mortgage broker to explain the details and risks associated with non-A lending, and to explore the help they may be able to provide. If your financial situation is still beyond their aid, it may be best to sell your home, or put off that desired home purchase until your existing debts are paid and you start fresh again with your credit.
