Flexible mortgage solutions offered by private lenders are an excellent alternative. One of the biggest reasons is that alternative lenders don't require the stress test imposed by banks. Interested borrowers need to check a few boxes when they are looking for the right private lender. Remember, these alternative loan solutions are perfect if you have bad credit, non-traditional income, or are self-employed.
If you're looking for excellent private loans, consider Mortgage Broker Store. Their alternative products rely more on equity than the requirements of traditional mortgages and loans, like the stress test. Remember, equity is the part of the property that's been paid off and is mortgage-free.
Understanding the Mortgage Stress Test
Lenders apply this set of mortgage rules the federal government regulates. It calculates whether applicants can afford their payments if their financial situation and or interest rates change. It's a test that's necessary and required for bank mortgages.
The mortgage stress test was first implemented because there were concerns about the size of the mortgage debt and how quickly consumers were taking it on. Traditional banks need to use the higher interest rate of the one you negotiated with the lender plus 2% or 5.25%, whichever is higher.
Potential borrowers can avoid the stress test with a private mortgage and avoid requirements like the debt to income (DTI) ratio. The DTI measures how well an applicant can manage payments and repay debt. It compares total monthly debt payments to income. It's one set of tools that traditional lenders use to see if applicants can afford the rates.
The DTI includes two elements: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.
Private lenders don't need to implement the stress test because they don't use the DTI. That makes for some big bonuses when you’re thinking about using one of these lenders. These alternative lenders focus on the borrower's equity and the value of the property, making them more flexible.
Benefits of Choosing a Private Lender
Private lenders aren't regulated by the exact federal requirements, as are more traditional lenders. They can supply mortgages and private loans for individuals and businesses that don't qualify under the stress test rules, including people with bad credit and irregular income.
Equifax reports that scores under 660 are less likely to be accepted for traditional loans.
- Short-term mortgages are available through private lenders without the stress test. These can be helpful for people looking to get some quick money to renovate an existing home before selling it.
- Applicants for traditional loans who are self-employed can have difficulty proving they have a steady stream of consistent income. Pay stubs and tax statements are part of building a foundation to pass a stress test, but private lenders bypass that requirement and accept irregular income. Small business owners like contractors and freelancers can get financing.
- There's lots of paperwork with traditional lenders involving the stress test. A private mortgage has a streamlined approval process. Providing for a private mortgage bypasses the financial documents needed for a more conventional loan.
Private mortgages can help applicants avoid the stress test and get approved quicker. These flexible lending options are an excellent solution for the following borrowers.
Who Can Benefit from Private Mortgages?
Several groups can benefit from these private mortgages.
Bad Credit Borrowers
Borrowers with bad credit who won't qualify for a traditional bank mortgage can opt for a private mortgage and avoid the stress. Remember, private lenders focus on the equity built up in a property rather than the credit score.
Homeowners Facing Power of Sale or Foreclosure
People facing power of sale or the less common foreclosure can also benefit from a private mortgage. These people can turn to one of these lenders to get a second mortgage or consolidate debt.
With the money you can get from one of these loans during the Redemption Period, you can stop the power of the sale process.
The Self Employed
Self-employed people have strict income verification requirements through a traditional lender. Those can include pay stubs, tax returns, a Notice of Assessment from the Canada Revenue Agency, and an employment letter.
The private lending process is much easier. There's no need to go through the rigours of a stress test. The most crucial factor here is having enough equity built up in a property. A private lender also wants proof of property ownership and standard identification documents. It's also important to remember that these properties must be properly appraised.
Borrowers Who Need Quick Cash
Private mortgages are perfect for homeowners who need the money to renovate and take advantage of time-sensitive opportunities to purchase another property.
Other people who can benefit from these mortgages might need to consolidate their debt for emergency home repair, legal fees, or medical bills. Regardless of the reason, private lenders don't need as much documentation, so the process is sped up.
Finding a reputable private lender is easier with a few guidelines.
How to Find a Reliable Private Lender
Any private lender you choose needs to be properly vetted. Private lenders must work with licensed and regulated mortgage brokers unless they are licensed and regulated themselves. The legal framework that regulates mortgage brokers in Ontario is the Mortgage Brokerages, Lenders and Administrators Act (MBLAA).The Financial Services Regulatory Authority of Ontario (FSRA) is the regulatory body that ensures mortgage brokers and the private lenders that work with them adhere to the MBLAA.
Real estate experts Jonathan and Ron Alphonso can help borrowers avoid the stress test with private loan solutions. You can reach them at 416-499-2122 or by email at [email protected].
Find out more about their services from the two websites they manage: mortgagebrokerstore.com and powerofsalesontario.ca.