What options do you have when chartered banks reject your mortgage application?

The Bank of Canada having just announced another rate increase, compounded by the stress test, which adds another 2% to the stated rate, is making harder and harder for some individuals to qualify for a conventional mortgage. Don’t despair, there are alternatives.

In Canada, both “B” and private lenders are considered alternative lending options outside of the traditional, regulated, chartered bank ecosystem. While there can be some overlap in their activities, there are distinct differences between the two.

B Lenders are typically regulated financial institutions, subject to oversight and regulations. They serve borrowers who may not meet the strict criteria of traditional lenders due to less-than-perfect credit histories or lower credit scores, self-employed individuals with non-traditional income sources, and newcomers to Canada.

Private Lenders are individuals or small groups that lend their own money directly to borrowers. Private lenders are not regulated financial institutions like banks. They generally serve individuals with poor credit, self-employed individuals or freelancers, real estate investors, and borrowers with unique financial needs.

Who should consider these options?

There are several reasons why a person in Canada might choose to use an alternative lender for their mortgage, or trying financial situation.

Difficulty qualifying with conventional lenders: alternative lenders often have more flexible qualification criteria compared to conventional lenders. If a borrower has a lower credit score (ex. under 650), limited credit history, irregular income, or other factors that make it challenging to meet the stringent requirements of traditional banks, they may turn to alternative lenders as a viable option.

Self-employment or non-traditional income: may face difficulties in proving their income stability to conventional lenders. Alternative lenders are typically more accommodating to these borrowers, considering bank statements, business financials, and other documentation to assess income and cash flow.

Quick approval and funding: alternative lenders are often known for their streamlined application processes, and faster approvals. If a borrower needs quick access to funds or has time-sensitive purchase requirements, such as buying a property through a competitive bidding process, they may opt for an alternative lender to expedite the mortgage approval and funding process.

Unique property or borrowing situation: some borrowers may have unique circumstances that conventional lenders may be hesitant to accommodate. This could include properties with unconventional features, properties requiring significant renovations, or borrowers with complex financial situations. Alternative lenders may be more willing to consider these scenarios and offer customized mortgage solutions.

Debt consolidation or credit repair: alternative lenders can be an option for borrowers seeking to consolidate high-interest debt or improve their credit. They may offer debt consolidation loans that help borrowers pay off existing debts, improve their financial situation, and potentially qualify for better mortgage terms in the future.

Past credit issues: borrowers who have had credit issues, such as a history of bankruptcy or foreclosure, may find it challenging to obtain a mortgage from conventional lenders. Alternative lenders may be more willing to work with these individuals, considering factors beyond credit scores and focusing on their current financial stability and ability to repay the loan.