Entering the housing market in Canada is a challenge for many. It’s expensive to buy a house. Without a strong credit score, you may find it difficult to secure an affordable interest rate with a traditional lender. However, a low credit score doesn’t disqualify you from your dream of becoming a homeowner. There are other options, such as private mortgage lending.
Here’s what you need to know about getting a mortgage from a private lender—what it is, who should consider a private lender, and what the risks are of taking on a private mortgage.
Mortgage Lending Options in Canada
In Canada, there are several different lending options, all with different lending criteria.
A Lenders
When you’re interested in buying a home, you might start by seeing what your bank can offer. Your bank is known as a traditional lender or an “A” lender. Most people aim to get a mortgage with an A lender because they typically offer the best rates and loan terms. But it’s usually harder to get a loan from an A-lender unless you have a good credit score and consistent income. The Canadian government also requires you to pass a homebuyer’s “stress test” to prove you can make mortgage payments if rates rise.
B Lenders
If you’re not able to qualify for a traditional mortgage, you can try a B lender, also known as a subprime or alternative lender. An example of a B lender institution would be Home Capital.
These lenders tend to have less stringent qualification criteria and cater to borrowers who can’t get a mortgage from an A lender. Since a B lender is taking more risk, the rates are typically higher than those of a traditional lender.
Private Lender
Another option is to go with a private mortgage lender. This is a private individual or company that offers loans to homebuyers who can’t qualify for a loan from a bank or alternative lender. Private mortgages are typically short-term, ranging from a few months to a few years. Since the lender is taking on a higher level of risk, you can expect a higher interest rate.
How Does a Private Mortgage Work?
A private mortgage works like a traditional mortgage. You get a mortgage loan to purchase your home, then pay it back in installments, with interest. If you can’t make your loan repayments, the lender can take over your property and sell it to make back their money.
Who Might Consider a Private Lender?
While you want to find the mortgage with the lowest interest rate and best terms, that’s not the reality for every borrower. Here are some of the reasons you might consider a private home loan lender:
- Low credit score. Most traditional lenders require a minimum credit score of 600 or higher. If you have a bad credit score and can’t qualify with an A or B lender.
- Limited credit history. If you’re a newcomer to Canada with a limited credit history, you might consider a private lender.
- Can’t pass the stress test. Federally regulated banks require that you pass a stress test to get a mortgage. With a private mortgage, there’s no stress test requirement. It’s up to the lender to determine the qualification criteria.
- Inconsistent income. Traditional lenders like to see consistent income. If you’re self-employed or you don’t have a regular cheque coming in each month, you might have better luck with a private lender.
- Need fast access. Private lenders tend to have a quicker approval process than traditional lenders.
- Failed mortgage renewal. If your current lender won’t renew your mortgage, you might be able to renew with a private lender.
What Are The Risks of a Private Mortgage?
Working with a private lender does come with several risks which you should consider carefully. Some of these risks include:
- Higher rates. Since a private lender is taking on a higher level of risk, they charge higher interest rates. This means higher payments for you.
- Lack of regulation. Unlike the big banks, private lenders are not regulated by the government. This allows them to set their qualification criteria, rates, and fees.
- If you can’t repay your loan, you risk foreclosure. With private lenders, this often happens more quickly than with a bank.
Alternatives to a Private Lender
If you can’t get an A or B mortgage and you’re not comfortable working with a private lender, there are other options to consider.
- Find a co-signer. A co-signer is someone who agrees to cover your loan payments if you’re unable to do so. They take on legal responsibility for your debt. Finding a family member or friend with a strong credit score and finances to co-sign a mortgage can help improve your chances of getting approved by the lender.
- Postpone homeownership. If you can’t qualify for a mortgage, consider waiting. Take more time to save up for a downpayment and work on improving your credit score so you can find a better interest rate.
- Rent to own. If you’re already paying rent, you can try to leverage your payments with a rent-to-own program, also called lease-to-own. In this program, your monthly payments are used to build a downpayment. Once your lease ends, you can apply for a mortgage using the downpayment you’ve built up through renting. The challenge is finding a rent-to-own property, though they are becoming more popular in Canada.
Get Debt Help – Speak to a Licensed Insolvency Trustee
If you’re a first-time homebuyer, have bad credit, or you’re self-employed with inconsistent income, you might find it hard to qualify for a mortgage. Traditional lenders tend to have stringent qualification criteria, including the mortgage stress test and while private lenders offer more flexibility, you’ll end up paying higher interest rates and you risk losing your house if you can’t keep up with your debt payments.
If debt or a bad credit score is keeping you from getting a mortgage and buying a home, contact a Licensed Insolvency Trustee (LIT). A LIT can assess your finances and recommend a solution to get you out of debt and start rebuilding your credit. Licensed Insolvency Trustees offer the widest range of debt options, including credit counselling, Consumer Proposals, and Bankruptcy. For a free, no-obligation consultation, give us a call at 1-888-371-8900, or complete our online contact form.
