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Alternative Lending – What is it and Why might I need it?

This is a guest blog written by Dan Pauls from Magenta Capital written for The Valko Team.  Dan is a Business Development Manager for Magenta Capital.

 

“Alternative lending” is a broad term that covers the many loan options available to any borrower that might not qualify for traditional mortgage financing.  The reasons for borrowers not qualifying are widely varied, since every borrower has a situation or circumstance that is unique to them.

Banks and traditional lenders have rigid, standard criteria that they must follow to approve someone for a mortgage.  Their borrowers’ credit history, job history, job type, income type, debt ratios, property type, down payment, etc. must all meet those requirements, which continue to get tighter and tighter in our current environment.  The benefit of the Alternative Lenders is that they can look at your unique circumstances for what they are, and they will assess the big picture of your overall application, using a common-sense approach.

Let’s look at the three most common reasons a borrower might require an alternative lender:

  1. Credit challenges

Life events happen, and sometimes bad things happen to good people.  Most people can relate to a situation where someone they know had their finances and credit score suffer due to a period of disability, unemployment, divorce or other unfortunate unforeseen event.  Alternative lenders will look at the big picture and do an overall risk assessment that goes beyond just your current credit score.  Typically, they will be able to look beyond this and consider your previous credit history, as well as assess your likelihood for your credit to improve in the future, using a common-sense approach.

  1. Income challenges

The days of having one job for your entire working life are long behind us.  Statistics tell us that the average person will change jobs 12 times in their lifetime.  Likewise, there are fewer Canadians employed in “full time, permanent” positions.  More and more jobs are now classified as part-time or contract.  A Financial Post article from earlier this year estimates that by 2020, 45% of the Canadian workforce will be deemed to be self-employed.  All of this is problematic for traditional lenders, who like to see their borrowers employed in full time, permanent jobs with guaranteed hours.

Alternative lenders will consider many types of income that traditional lenders will often have difficulties with, including income earned from:

  • multiple part time jobs instead of one full time job
  • contract work
  • borrowers who are still on probation
  • newly self-employed
  • bonus/commission income
  • disability insurance
  • rental / investment income
  • cash / tips
  1. Property challenges

Even if you are someone without any credit or income challenges and are deemed a low-risk borrower, all lenders still need to approve your specific property before they agree to fund the mortgage.  Alternative lenders will often be more flexible in terms of the type of property and have programs specifically for the financing of rental properties, student properties, multi-unit rental properties, repair and resell, etc.

Conclusion:
In the same way that there are countless circumstances that cause someone to require an Alternative Lender, there are a vast number of lenders across Canada to choose from.  Each has their own niche and their individual lending criteria and risk tolerance.  Knowing which lender is the best fit for your specific situation requires the services of an highly experienced Mortgage Broker.  Your broker will work on your behalf, and work with the lender, to ensure that their policies are the best fit for your situation.

 

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