Know your ABCs — of mortgage lenders that is.
Trying to navigate the mortgage world can seem like a daunting task. The up-side of having so many choices is that consumers have access to solutions for almost every situation.
As a mortgage broker, I periodically get calls from realtors who say that their buyers have been declined by a bank, and ask if there is a way that I can find them a mortgage.
Many times I can.
My first home purchase was very different than what I see with clients today. I lived in a small, northern mill town. Everyone earned essentially the same amount of money. All of the houses were pretty much the same.
My ex-husband and I went looking at houses with a realtor, made an offer, then made an appointment to get a mortgage.
We bought our first home for $35,000 and had absolutely no idea what we were doing.
As a young couple with strong income and no debt other than a Visa card, it didn’t occur to us that we wouldn’t get a mortgage. But what about if you are not in that situation?
What if you live in an area like the Okanagan where housing prices are high and wages comparatively low?
What if you have had blips in your credit?
What if you already have a home with a significant amount of equity, but your income has dropped?
There are several types of mortgage lenders in the marketplace. We generally categorize them as A lenders, B lenders, or private (equity) lenders. Within each of these groups, each lender has slightly different guidelines.
When we talk about A lenders we are generally referring to chartered banks, monoline lenders, and credit unions.
Monoline lenders are companies that offer only mortgages. They do not have branches or storefronts, and do not have other financial products that they will try to cross-sell to their clients.
A lenders typically offer the lowest mortgage rates, and clients need to qualify based on fairly strict guidelines. When most people think about getting a mortgage, they first think of approaching an A lender.
B lenders generally require more down payment or equity and have somewhat less strict qualification requirements. B lenders will consider clients with lower credit bureau scores, and may accept less traditional sources of income.
The trade-off is slightly higher interest rates. B lenders tend to be about one percentage point higher than A lenders; each application is priced differently based on the client’s particular situation.
Private or equity lenders are primarily concerned with the property that is being mortgaged as opposed to the client. Private lenders typically want to see significant equity in a property (generally at least 25-35 per cent) and are less concerned about a client’s credit history.
Interest rates are considerably higher with private lenders, and most charge fees to set up a mortgage. Private mortgages are intended as a short-term solution to help clients get back on their feet or deal with an urgent situation where they don’t qualify to borrow money any other way.
Within each of these groups of lenders there are differences in the mortgage products they offer and how they qualify their clients. One example of this is allowable income.
Over the last few years most of the banks have decided not to include child tax benefits as income. There are still several financial institutions that do, and this can sometimes mean the difference between qualifying for a mortgage or not.
Another example is the New to Canada programs offered by many lenders. Last fall, I helped a couple that was referred to me by their chartered bank. Most of the couple’s down payment came from a housing incentive that was part of his job offer.
The limited credit they had was squeaky clean, his employment was solid and income was high, but their bank would not accept the funds from his employer as their down payment.
I was able to find them a mortgage at a monoline lender with a lower interest rate than their bank, and the funds from work were an acceptable down payment.
For borrowers putting down less than 20 per cent, minimum credit score guidelines are set by the mortgage insurers (CMHC/Genworth) and the lenders need to work within those guidelines. For borrowers that have 20 per cent or more down, certain lenders offer more flexibility with respect to credit scores.
If you have been through tough times and your credit is badly bruised, working with a B or private lender for a short period of time can help you reestablish your credit and finances. Again, the goal is to set you up to move back in to an A lender with lower interest rates.
The type of home you are buying might also affect the decision of which lender to work with. Some lenders will only consider cookie-cutter homes in urban neighbourhoods, while others are open to financing homes in smaller communities, small hobby farms, or acreages.
As a mortgage client, knowing that there are alternatives available can mean the difference between renting for another few years or buying a home now.
It’s a great idea to talk to a mortgage broker to see what options are available for your particular situation.