How B Lenders Can Help You Get A Mortgage in Canada
If a bank or credit union denies your application for a prime mortgage, you still have alternative financing options. Many homebuyers in this situation turn to B lenders, with more flexible approval criteria than major banks and other “A lenders.”
Homeowners seeking to refinance for debt consolidation but not meeting the prime mortgage criteria might consider B lenders. These lenders offer an alternative with more lenient approval standards compared to traditional A lenders.
Let’s examine what sets B lenders apart from A lenders and identify scenarios in which applying for a B lender mortgage makes sense.
What Are B Lenders?
Alternative lenders, or B lenders, can approve mortgage applications for borrowers who don’t qualify for a prime mortgage from a federally regulated credit union or bank. These B lender mortgages are generally available through financial institutions like trust companies, monoline lenders, and private lenders. Interestingly, some A lenders, including certain credit unions, also provide B mortgage options.
Overall, B lenders tend to have more relaxed income, debt, and credit score criteria for mortgage approvals. They might also forgo the mortgage stress test requirement. However, these flexible terms often come with higher interest rates for borrowers.
B lenders provide a wide range of mortgages, including specialized options tailored to buyers with specific needs.
Who Should Consider B Lenders?
A B-lender mortgage might be the only viable option for certain Canadian home buyers. Here are some categories of prospective buyers and current homeowners who might consider a B lender mortgage:
- • Individuals looking to purchase a home with poor credit
- Self-employed individuals and those with non-traditional or irregular income
- Recent immigrants to Canada lacking an extensive Canadian credit history
Homeowners with significant debt burden seeking to refinance for high-interest debt consolidation
Distinction Between A Lenders and B Lenders
As previously stated, lenders encompass major federally regulated banks in Canada and provincially regulated credit unions. These prime lenders typically enforce more rigorous criteria for their mortgage products, but their distinctions from B lenders extend beyond that.
Let’s delve into the key distinctions between these lender categories and the mortgage products they provide.
Mortgage Providers
A lender mortgages are primarily offered by major banks in Canada, known as the Big Five: Toronto-Dominion Bank (TD), Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal (BMO), and Scotiabank. Additionally, provincially regulated credit unions fall into this category. Borrowers seeking prime mortgages can directly approach banks and credit unions. Alternatively, they can engage mortgage brokers such as Rocket Mortgage Canada and UL (Rocket Mortgage™), who facilitate connections between borrowers and lenders, offering prime and non-prime mortgage solutions.
B lender mortgage providers include monoline lenders, mortgage investment corporations (MICs), trust companies, and private lenders. Additionally, certain credit unions may operate as B lenders. Mortgage brokers offer an excellent avenue for exploring B mortgage options as they can introduce you to various lenders and their offerings.
Credit Requirements
A lenders represent the conventional financing option in Canada. While criteria may differ, most A lenders typically mandate a minimum credit score of 650 for mortgage eligibility. Borrowers with higher credit scores can generally anticipate securing more favourable interest rates.
In contrast, B lenders generally impose lower credit score thresholds compared to A lenders. However, due to their acceptance of lower credit scores, B lenders often levy higher interest rates to mitigate the increased risk they assume.
Debt And Income Requirements
A lenders evaluate your mortgage affordability through your debt service ratio (DSR), also known as the debt-to-income (DTI) ratio. This ratio comprises the gross debt service (GDS) and total debt service (TDS) ratios. To qualify for an A lender mortgage, your GDS should be below 39%, while your calculated TDS must not surpass 44%.
Collaborating with an A lender also entails undergoing the mortgage stress test. This assessment gauges your capability to manage your mortgage payments in the event of future interest rate increases.
B lenders may greenlight applicants with elevated debt service ratios (DSRs), usually setting the gross debt service (GDS) and total debt service (TDS) thresholds at a maximum of 50% each (although private lenders and select B lenders might accommodate higher ratios). They are also more open to non-traditional income sources (such as inheritances, bonuses, etc.) and typically waive the requirement for the mortgage stress test.
Down Payments
A lender mortgage typically requires a minimum down payment of 5% for homes valued up to $500,000, with pricier properties often necessitating larger down payments. However, it’s important to note that borrowers who contribute less than 20% as a down payment must also cover the cost of mortgage default insurance.
B lenders mandate a minimum down payment of 20% from borrowers. This increased down payment mitigates the risk undertaken by B lenders when approving applicants with lower credit scores or other financial profile concerns.
Mortgage Rates
As previously discussed, B-lender mortgages typically have higher interest rates than prime mortgages. Similar to the increased down payment requirement, the higher interest rate associated with an alternative mortgage counterbalances the lender’s risk when extending a mortgage to individuals with potentially inconsistent financial profiles.
However, mortgage rates can fluctuate among different lenders, underscoring the importance of conducting thorough research and comparison shopping.
Term Lengths And Amortization
A lender mortgages commonly adhere to the conventional 25-year amortization period, alongside term durations ranging from 5 to 10 years. However, repayment periods may exhibit variability across lenders, providing you with potential opportunities for shorter terms.
One benefit of alternative mortgages is the potential for extended amortization periods and abbreviated mortgage terms. B lender mortgages, for instance, may grant amortization periods of up to 35 years and contracts spanning 1 to 3 years, affording borrowers greater repayment flexibility and more frequent renewal prospects.
Pros And Cons of B Lender
Before considering collaborating with a B lender, ensure you grasp the advantages and drawbacks of this method of home financing.
Pros
- B lenders can extend mortgage and refinancing opportunities to a more diverse spectrum of borrowers compared to A lenders.
- Borrowers possessing lower credit scores and elevated debt service ratios (DSRs) might find eligibility for B lender mortgages more attainable, thanks to the leniency observed in these criteria.
- The shorter 1—to 3-year terms allow borrowers the flexibility to adjust their mortgage arrangements at renewal, such as transitioning to A lender financing if desired.
- Opting for refinancing through a B lender to consolidate high-interest debt, in case you don’t qualify for a prime mortgage, could still result in overall interest savings.
Cons
- B lenders typically impose elevated interest rates and extra fees, potentially resulting in increased mortgage payments and closing costs for homebuyers.
- B lenders mandate a minimum down payment of 20%.
- Choosing a B lender mortgage with an extended amortization period entails paying more interest over the loan’s duration.
Securing a B Lender Mortgage: What You Need to Know
If you’re prepared to purchase a house using a B lender, here’s how to proceed:
- Review your credit score: Assess your credit report to determine your eligibility. If your score is relatively high, consider applying to an A lender initially.
- Establish your housing budget: Determine the affordability of the house and the amount you’ll need to borrow within your budget. Ensure you have sufficient funds for the down payment, typically at least 20% of the home’s value.
- Explore and compare B lenders: Research options include private lenders, monoline lenders, trust companies, and credit unions offering B lending services. Consider collaborating with a mortgage broker to identify the most suitable lender for your needs.
- Initiate preapproval and present your offer: The preapproval process can help you gain insight into your mortgage affordability. Unlike traditional A-lender mortgages, undergoing a stress test for preapproval with a B-lender mortgage is typically unnecessary at this juncture. Once preapproved, proceed confidently to submit your offer for the desired property.
- Submit a comprehensive mortgage application: Upon acceptance of your offer, proceed to complete a detailed mortgage application. Ensure all necessary requirements for the mortgage are fulfilled and have your down payment funds readily available.
- Obtain financing and commence repayment: Expect notification regarding mortgage approval within 2 to 10 business days. Subsequently, finalize the home purchase, settle closing costs, and receive the keys to your new property. Repayment typically commences 30 days after the home’s closure.
- Enhance your credit score: Since many borrowers opt for a B lender due to lower credit scores, consider steps to boost your creditworthiness. Improving your credit may enhance your prospects of securing a more favourable interest rate during mortgage renewal.
If you’re seeking to refinance through an alternative lender, the process remains largely unchanged, except for steps associated with locating and offering a new property. Rather than establishing a housing budget, focus on calculating whether refinancing to consolidate debt will result in net savings after factoring in associated refinancing costs.
Conclusion
B lenders can approve mortgages for homebuyers and existing homeowners who may not typically qualify with A lenders. As you assess your options, weigh the disparities between A-lender and B-lender mortgages regarding requirements, expenses, term durations, and providers. If securing a prime mortgage proves challenging, a B lender mortgage could serve as your pathway to homeownership.