As always, for all things mortgage related, I turn to Keaton Kirkwood for his view on different lenders and what makes them different. I will allow him to unravel this mystery for you!
Keaton Kirkwood: Mortgage Lenders
To get a mortgage you have to convince a lender that you are a safe investment.
The challenge is that A, B and C lenders determine this in different ways. The secret is in knowing which types of lenders are most likely to approve your file.
Who are the Different Mortgage Lenders?
It’s no secret that it’s the hardest it’s ever been to get a mortgage. With the wrong lender it can be next to impossible to get approved so I will show you how to find the right lender and get approved.
The first thing you need to know is what separates the three classes of lenders.
A lenders have the lowest rates and strictest guidelines.
B lenders have higher costs and far more flexible guidelines.
C lenders have the highest cost and greatest flexibility.
Each class of lender has its own strengths and weakness. The key to getting the best deal is knowing which type of lender will result in the lowest cost to you. Quite often the solution with the lowest cost to you does not have the lowest rate.
A Lenders
A lenders consist of banks, credit unions and monoline lenders. Where there are some differences in how they operate they all have the lowest rates and strictest guidelines.
A lenders solve the “are you a safe investment” question by making sure there is enough income to pay your debts and live your life.
Banks offer competitive rates and a wide range of products. Working with the right bank is key as each bank as a unique set of products and policies. Your mortgage may be a guaranteed decline at four banks but a slam dunk at the fifth. The trick is knowing which bank to approach and how to present your file.
Monoline lenders are often owned or funded by the major banks. They specialize in extremely low rates on CMHC insured purchases and renewals. These lenders tend to have some of the lowest breakage penalties as well. The trade off for monoline lenders is that they generally follow the CMHC guidelines. This means the strictest lending guidelines possible.
Banks and monoline lenders are very rigid in their lending because they must follow rules set by the Office of the Superintendent of Financial Institutions also known as OSFI.
OSFI regulates the banks and monoline lenders but credit unions do not need to follow the OSFI guidelines.
An example of this is qualifying a mortgage using a rate 2% higher AKA the stress test. While many Credit Unions will use the stress test they do not have to. This means if you know where to look and how to ask you have the stress test waived. Credit unions have the ability to blur the lines between commercial, residential and business lending making them the most flexible of the A lenders.
Overall A lenders have the most competitive interest rates but are restricted to qualifying applicants using income tax returns. Many A lenders will not look at more complex income sources and may require self employed borrowers to pay higher taxes to qualify. With all A lenders you can expect to be asked for all sorts of documents like tax returns, ID, and bank statements.
Getting a mortgage is far easier if you are prepared. If you want to know what documents you will need here is a tool to get a list of exactly what will be needed you can be ready.
B Lenders
B lenders charge higher rates but are far more flexible than A lenders. They require 20% down and still qualify based on income but can satisfy their income requirements in different ways. Whether it’s from roommates, adding up deposits in bank statement or using 100% of a property’s rent they can meet their income requirements in creative ways.
The drawback to B lenders is that they often require large amounts of paperwork to verify the incomes they use. B lenders manage risk by vetting the borrower and screening the property. This can lead to B lenders declining deals for older properties, small condos or rural properties. These lenders balance the requirements on the borrower and the property.
Whether its easier qualifying so you can save on income taxes, getting a mortgage with a consumer proposal or needing to use income from a new business, B lenders can offer the flexibility you need to get approved. One of the most common uses for B lenders is self employed borrowers using the flexibility of a B lender to save tens of thousands in taxes.
C or Private Lenders
The most expensive of your lending options will be private lenders who lend with the assumption they will foreclose on the property they are financing. This means that there is a heavy focus on the property and exit strategy with less concern for the borrower’s situation.
A key term in private lending is loan to value which means the amount of debt relative to the value of the property. A low loan to value private mortgage may cost 9% while a high loan to value mortgage might cost 15%. The loan to value of a mortgage and marketability of the property being lent on are a private lenders main concern.
The second most important detail to private lenders is the exit strategy. They price the mortgage based on the assumption they will foreclose but its not something they want to happen. Private lending is expensive and generally unsustainable so a clear plan to pay off the mortgage is needed. This can be refinancing, selling etc. The key thing is that it is reasonable.
There are two types of private lenders, the first are mortgage investment corporations or MICs. These lenders have large pools of funds from investments and have set rules they must follow. A common example is that most MIC’s will lend on the purchase price or appraised value, whichever is lower.
A common request is for a lender to lend on the market value of a property when it is higher than the purchase price.
To get this done you generally need to find a true “private” lender. This is usually an individual and comes at a higher cost. The biggest drawback to true private lenders is consistency and reliability. It is not unheard of to hear that an induvial private lender pulled financing days before they money was expected.
An example of using private lending well would be using a private mortgage as a worst-case scenario to write a subject free offer. If this allows you to buy the property for $40,000 less it may be reasonable to spend an extra $20,000 in interest. The key thing is to ensure you perform proper due diligence and manage your risks.
Getting a mortgage is unlikely to get any easier anytime soon and knowing which lenders to approach will be key to getting your mortgage approved.
The best way to be successful is to remember that all lenders see your mortgage as a risk they are taking on. The trick is knowing how each type of lender manages the risk of lending and how to show them you are a good investment.
We can make this process even easier for you, give us a call or send us an email and we can start helping you get qualified today.
