When it comes to getting a mortgage in Canada, traditional Prime A lenders have long been the go-to option for many borrowers. However, not everyone fits into the prime lending criteria, which can leave them struggling to secure a mortgage for the home they want. In these cases, alternative mortgage options, such as B Lenders and Private Lenders, can provide a lifeline.
What is a B Lender?
B lenders, such as credit unions and smaller banks, cater to borrowers who don’t necessarily meet the criteria of Prime A lenders but are still creditworthy. They operate within a regulated framework and offer more flexible lending options.
The advantages of choosing a B lender
More flexibility and a lower barrier to entry
If you were turned down by a big bank due to unstable income or high debt, B-lenders will still give you an opportunity to be considered for a mortgage. Oftentimes, they’re willing to work with borrowers who have lower credit scores or a history of credit issues too. They consider factors beyond credit scores, such as your overall financial picture, making it easier for borrowers with less-than-perfect credit to secure a mortgage.
Rates are typically offered on a 1 to 3 year term
B-lender mortgages are usually offered on a 1 to 3 year term, which allows buyers to secure a mortgage with the peace of mind that they can reassess their financial situation a few years down the line. This allows them to easily transition to a more traditional lending source without penalty fees in the event that their financial situation and personal goals have changed over those years.
A great stepping stone for first-time buyers
Many first time buyers in Canada are eager to get into the housing market yet it can be difficult for them. B-lenders provide a helping hand to get you started and eventually, you can access what A-lenders are offering. It’s a temporary but solid option for many.
The disadvantages of choosing a B lender
In comparison to A Lenders, B Lender mortgage rates are slightly higher. This is because you pose more of a risk to the lender and they offset this by charging higher interest rates, as well as a commitment fee or lender fee upfront. When working with a B lender, buyers are also required to make a minimum down payment of 20%. For some buyers, this can be a challenge, however if it’s something you’re financially ready for, you’ll be able to avoid paying CMHC mortgage default insurance.
What is a Private Lender?
Private lenders are individuals or organizations that provide mortgage loans outside of the traditional banking system. These lenders often have more flexible lending criteria, making them an attractive option for borrowers who may not meet the strict requirements of traditional lenders.
The advantages of working with private lenders
Greater accessibility for borrowers
Private lenders are more willing to work with borrowers who have less-than-perfect credit scores or inconsistent income histories. They focus less on credit history and more on the value of the property being mortgaged, allowing borrowers with unique circumstances to access funds they need.
More flexibility on features and unique properties
Private lenders can be more flexible in regards to mortgage terms, repayment schedules, and loan-to-value ratios. They are willing to consider unconventional properties, such as rural homes or fixer-uppers, which may not meet the criteria of traditional lenders. This flexibility can be a game-changer for borrowers with unique property requirements and needs.
A quicker approval process
Private lenders often have streamlined approval processes and quicker turnaround times compared to traditional lenders. This can be beneficial for borrowers who need financing urgently or have time-sensitive real estate transactions.
The disadvantages of working with private lenders
While private lenders may offer some advantages, it's important to consider the downfalls that come with this option too. First, private mortgage lenders have higher interest rates compared to traditional lenders because they often assume higher risks by lending to borrowers who may have less-than-ideal credit scores or limited financial history. Another drawback of private lenders is that they typically offer shorter loan terms. While traditional lenders often provide terms ranging from 15 to 30 years, private lenders tend to offer terms ranging from 1 to 5 years. This means you'll have a shorter period to repay the loan in full or refinance with a different lender.
While traditional Prime A lenders tend to be the preferred choice for many borrowers, private lenders and B lenders still provide great opportunities for those who don’t meet the necessary criteria. When considering alternative mortgage options, it’s important to consult with a mortgage professional who can guide you through the process and help you navigate the pros and cons of every option.
At Homewise, we work with over 30 banks and lenders to find our clients a mortgage that aligns with their unique goals and financial circumstances. Apply online with us in just five minutes today and one of our dedicated Mortgage Advisors will be in touch.
