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16 Jan

The different types of lenders


Posted by: Aneta Zimnicki

Many consumers think that mortgages can only be obtained by walking into a ‘bricks and mortar’ retail bank. But the mortgage lending world goes far beyond that. There are so many mortgage options and lenders available, working with a mortgage broker specializing in your specific needs is your best approach, as a broker has access to these channels.

In general, there are 3 types of lenders, ‘A’ lenders, ‘B’ lenders and private money. These categories are referred to a variety of other different terminologies, and some lenders have multiple product umbrellas that cater to ‘A’ stream and ‘B’ stream.

‘A’ lenders are the most conventional and popular. These lenders cater to clients who have decent credit, decent income and debt ratios and where the subject property is not inferior in quality, type or location (based on the lender’s policies). The mortgage rates from the ‘A’ lenders will be the most competitive and appealing, as the risk for the lender is much less than the cases presented to the ‘B’ or private lenders. ‘A’ lenders typically have the strictest policies, however, the majority of mortgages fall into these categories.

Also to note here is that ‘A’ lenders (also applies to ‘B’ and private lenders) can be a bank or a ‘non-bank’. A ‘non-bank’ lender usually doesn’t take deposits from the public therefore is accessible only through the mortgage broker channel. There are a lot of myths and unfounded fears surrounding non-bank lenders, maybe much of it has to do with the US financial crisis. However, it is very important to note here, financing is a highly monitored industry in Canada, therefore you should feel comfortable dealing with a non-bank lender. Many non-bank lenders are very big, with billions of dollars of assets on their books. They also have policies based on regulations and beyond that, also create their own policies to mitigate risk and ensure they stay in business. A non-bank lender often is a ‘mono-line’ lender which means all they do is mortgages, you will benefit from this specialization and you won’t get cross-solicitation of other loan products like you may with the banks. A non-bank lender usually does not spend the huge amounts of money the banks do on advertising, and also does not invest in bricks and mortar for their own retail space, so you can very well see great rates and service as a result of those savings.

‘B’ lenders are much more flexible on the applicants’ qualifications, and possibly on the subject property (they might be more accepting of different types of property). ‘B’ lenders may be more open to bruised credit, past bankruptcies or consumer proposals, income type, for example business for self or stated income, people with large rental portfolios, equity lending and higher debt ratios. Secondary financing can be found in the ‘B’ lending space. In general, when qualifying, ‘B’ lenders look less at the applicant and more at the subject property, assessing it for collateral, in case the client defaults. If the property is inferior, needs work, is in a poor location or deemed ‘not marketable’ in its current state, the lender may decline the application. ‘B’ lenders do have policies, in addition the underwriters for these lenders may spend more time reviewing on a case by case basis. Qualifying for ‘B’ lender involves more time and effort, therefore you may see fees associated with this type of financing. The interest rates from ‘B’ lenders are typically higher than ‘A’ lenders, due to the fact that the lender is taking on more risk with the applicant. Usually the term length for a “B’ loan is shorter than’ A’ lender loan, for example 1 or 2 years, enough time to remedy your issue and position yourself to qualify for an ‘A’ lender.

‘Subprime’ mortgages in the US would be consider ‘B’ loans for the most part, these applicants were high risk, however, the story with these lenders is entirely different from that of Canada, the policies were absolutely ridiculous, too much weight was put on the property future value and applicants’ qualifications (or lack thereof) were completely ignored. The lender policies created (or lack thereof) were not sustainable, realistic and not in the best interest of the customer or lending company.

Lastly there is private lending, one may find themselves in this space when plan ‘A’ or ‘B’ don’t fit. There is also bad stigma associated with this category, the stereotype is people being taken advantage of by fly by night companies. On the contrary, if dealing with a reputable broker, this avenue could be the solution to your financing problems. Private lending is essentially private individuals or group of individuals interested in making a return on their investment. Because it is private, the policies for lending is up to the individual or group that is lending. The policies are much more flexible than ‘A’ or ‘B’ lenders, and the processing of the loan may also be quicker, depending on the lender. This could be a good fit for inferior properties about to undergo renovation projects, short term real estate investment strategies or short term remedy before getting on the path towards ‘A’ or ‘B’ lender. Interest rates are significantly higher, due to the risk and complexity of the deal, however term lengths are very flexible, often quoted in months and interest only payments. Fees should be expected if dealing with private lending. Many real estate investors use private money as part of their strategy, the cost of the loan is factored into the project, the benefit is that the project can happen, otherwise with no flexible financing there would be no deal.