Alternative Lending – we say Yes when your bank says NO!
Alternative lending is a new hybrid in the Canadian lending landscape. Aimed at borrowers who do not meet traditional lending criteria.
A viable, shorter term solution is available to borrowers that have credit impediments. Alternative lending is also priced at a reasonable price, compared to mainstream lending.
What are credit Impediments? Recent discharged bankruptcies, paid or unpaid consumer proposals are instances considered. There is no mandatory waiting period of discharge so a borrower can qualify after 1 day of discharge. Other acceptable derogatory credit are, collections, written off debts, and consumer debt arrears.
Finally, it helps borrowers who do not have established credit histories.
Alternative lending will consider credit scores as low as 500, albeit with lower. Lower end scores may affect pricing and lending values.
Debt Service Ratios
Alternative lending is more flexible with debt service ratios. Conventional lenders lend based on GDS and TDS of 32 and 42. Alternative lenders may go as high as 45 and 50. In some cases where LTV% is 65% or less, ( equity basis) the GDS and TDS may even reach higher proportions. The new stress test will turn higher credit score borrowers to alternative lending.
Other advantages of alternative lending is the flexibility with documentation. This is particularly so for self employed individuals. Instead of needing 2 years of Notice of Assessments, they will need to 6 to 12 months worth of bank statements. This is to show ample cash flow received.
But there are some down sides with Alternative lending. Pricing and a tighter lending value or LTV%.
In alternative mortgages property location is of significant importance. Lenders focus on major city areas with populations of 50,000 or more. They may consider smaller outlining areas but with reduced lending values. For example in Toronto and Gta areas lending maximums are set at 80%. In outlining smaller areas maximums may be set at 75, 70, or 65%. Generally this applies for both purchases and refinancing.
Pricing or rates current offered start at 1% to 2% above the best 5 years rates. Another draw back is, instead of having insurer premiums, lenders will charge a 1% lender fee.
In Alternative lending terms are shorter then in conventional financing. Terms of 1 to 3 years are common. The shorter term allows the borrower time to improve their credit. At the end of the term the borrower could qualify mainstream.