Subprime (B) and private lending options available to clients.
In Canada there are three lending tiers. The top tier or A lending as it sometimes called refers to clients who can qualify on income and credit and go through banks and other A type lenders. This type of lending would represent the majority of mortgage lending in Canada. There is however two other lending options available to consumers, B and private lending. This source of lending represents a large portion of the overall Canadian mortgage lending market.
B lenders are large Canadian institutions offering a variety of lending mortgage products. Clients that fall into the B category would be missing one of the major components that the banks and other A lenders require such as income or good credit. They maybe clients who were recently bankrupt. They maybe clients who are self employed and do not show the income or have good credit to qualify with an A lender. Whatever the case these lenders provide a good lending option to the consumer. They do require a credit score but not as stringent as the A lenders. With the debt loads that most Canadians are carrying these days and with more than 30% of working Canadians either self employed or on commission income, B lending is a popular and proven source of lending.
B lenders will look for at least 15% down on a purchase or refinance. Interest rates are higher than A lenders but not by much, maybe 1.00% to 2.00%. There are usually fees of around 2.00% to 3.00%. The borrower does not pay insurance premiums as these lenders are self insured.
This type of lending is usually offered as a short term solution until the client either gets there credit back in line or has the income to qualify through an A lender. 1 to 3 year fixed terms are common with this type of lending.
These lenders are sometimes wealthy individuals who are searching for a better return on their money. They work with lawyers or set up their own companies to loan out money to consumers.
These lenders lend on equity in the property. The lender is not concerned with credit or income but will review both to get an overall feel for the applicant. Their main interest is the property. Private lenders will lend on properties outside of the box such as churches, farms and raw land. Construction financing for small and large projects is popular in private lending because the lenders do not impose the stringent guidelines that A lenders do on the client.
As with the B lending private lending provides a short term or quick fix solution. The terms are usually short and not over a 1 year period. Interest rates and fees are higher than B lending between 6.00% and 10%. The maximum loan to value is around 75%.
Second mortgages fall under private lending. Second mortgages are a popular lending source for clients who can only get a first mortgage up to say 70% but need 80%. A second mortgage can be set up for the other 10%. Another example is clients who need to refinance a property but do not qualify through an A lender or maybe do not want to break their first mortgage and therefore set up a second mortgage instead.
Clients selling their home may require a second mortgage to renovate or fix up their home before listing.
Second mortgage interest rates are usually over 10% with fees. They are usually for small amounts and over a short term.