What is the difference between Alternative Lenders vs Private Lenders?
February 10, 2020 | Posted by: Sherry Corbitt
If you are being offered a mortgage and the term Alternative lender is being said, what does that mean? In the mortgage industry we commonly break a mortgage into three levels which is dependent on credit, equity, ability to repay the mortgage and existing debts.
If you do not currently fall into a bank type mortgage due to any of the above reasons, you may be offered another solution. This is usually an Alternative lender or a Private (MIC) lender.
Typically an Alternative lender still has tight guidelines that they follow regarding your ability to repay the mortgage. This is called GDS and TDS: Gross Debt Service (mortgage payments, property taxes and heating costs per month) and Total Debt Services (mortgage payments, property taxes, heat AND all other debts like car loans, credit cards, loans etc). They want to understand your employment and income that comes into the home and are flexible on more creative options that a bank may not consider such as looking at Child Tax Credit, recently established child or spousal support and additional income from another adult in the home but who isn’t on the mortgage (this is called Contributor income). These lenders are very sensitive to the equity in the home and rarely will consider a mortgage over 80% Loan-to-Value of your home. For example if a home is worth $500,000, they will go to $400,000.
Rates are usually between 4-6% with set up fees of 1-2% of the mortgage balance. You will pay for your lawyer and an appraisal (approximately $1500). They will allow for property and income tax arrears but frown on mortgage payments currently in arrears. Clients currently in consumer proposal or bankruptcy can be worked with to pay out.
Private Lender/MIC (Mortgage Investment Corporation):
These lenders have a much higher risk tolerance and focus mainly on the equity in the home, not the client’s income or credit situation. Some lenders do not even ask for income documents or proof, only that if income taxes are outstanding. The max loan-to-value is almost always 90% but most like to only go to 80%.
Rates start at 6.50% and go up from there depending again on the equity and home. Typical fees will be between 3-5% and you will pay for both their lawyer (typically $1100-2000) and your lawyer. Appraisals are always needed.
These are usually shorter terms: 6 months to 2 year with renewal fees if you need a longer term at renewal. The goal of these lenders is to be a bridge to help you rebuild or fix whatever your concern is and move you up into an Alternative lender at renewal. Their goal is not to lend you money indefinitely just so you better your situation and move forward.
Both an Alternative lender and a Private lender are interested in understanding your story: Why are you in need of their solution? Job loss? Illness? Hardship? Divorce? Or just a hiccup on your journey? They also need to know what our exit strategy is and how we plan to get their money back. Are you going to sell? Is your employment/income going to be changing? Will your credit be repaired?
It is our team’s job to help understand the property’s worth, the story of how the situation happened and how we plan to move you forward into a better place and then match-make you to the lender and mortgage that best suits your current needs and your future dreams.