The ABCs of Mortgage Lending

Everybody in the marketplace is very familiar with traditional A financing. That’s your local bank that you have a bank account with and you might have a credit card. So when it comes to getting a mortgage, it’s very natural to go directly to the bank because they do offer the lowest rates in the marketplace. You always see those commercials they’re advertising the lowest rates and they don’t charge you any fees. The only caveat is that you do have to qualify: you have to have good income and good credit, and then you can actually start getting a mortgage through a bank at 5% down payment.

 

So what if you don’t fit into this guideline? Maybe you’re actually are self-employed, you’re not receiving a payroll every two weeks, or you’re operating a business. In this case, you might actually be writing off a lot of expenses to reduce your taxes. That’s great, but not in the bank’s perspective because they want to look at the highest net income. Over here on the B side, that’s a non-issue as they’ll charge you slightly higher rates that might be 1.5-2% more to work with the B company. They usually charge a 1% fee of what you’re borrowing, not what the house is worth, and the broker setting up the deal for you may also charge you a 1% fee of what you’re borrowing. So in the case of the A sector saying all together “No, we’re not going to lend you money”, we can go to the B sector and get you financing. Yes, it’s a little bit more expensive there are fees associated but now you can finance your next home and now you can refinance your home to pay off some debts and they can take bruised credit.

 

Now what if you still don’t fit into this category? The worst has happened, you lost your job, you filed bankruptcy, you’re in a proposal, but you do have money, equity, and a lot of down payment. Well, we can go to a private lender called a C lender. We have two types: institutional private lenders and individuals. Institutional private lenders are companies that understand the situation and they don’t underwrite the deals. Unlike the banks or the trust companies that underwrite the deal, the institutional private lenders know you don’t have any money coming in and they know you don’t have any credit. I’m sure you all have seen those commercials, “Hey, you own a home? You’re approved”, that’s a C lending guideline. The other type of C lender is are individuals. You yourself can be a lender, your parents, your family members, or your friends. Individuals can physically take money out of their bank account and lend it to another individual. In this kind of transaction, we’re looking at much higher rates, starting at 6% and above depending on the deal, and the fees vary. The lender does charge a fee around 2% depending on the amount of the mortgage and the broker will be charging a fee for this kind of lending. Like I’ve stated, no income needed at all, bad credit is a non-issue because what the underwriting guidelines are on this is completely different than A and B.

 

So I always get asked, why would somebody borrow money through a C lender when they’re charging an arm and a leg for financing? Well, when you add up all the fees you’re looking at 9-10% on the financing but it’s a lot better that you think. A typical client that might apply for C financing is somebody who has six or seven credit cards maxed out at and they’re behind on payments but they do own a home that has equity. So it makes more sense to refinance your home and pay off all that expensive credit card debt so you only have one payment. You’re starting fresh and then you work your way back to the B side and then eventually to A.

There are five different criteria that the lenders are looking at: location, type of property, condition of the home, loan to value, and marketability. We’ve all heard the term location, would you rather put your money in a property that’s in Downtown Toronto or out in the boonies? Exactly same with lenders, they want to be in a very dense location because that’s security for them. The second thing is property type, what kind of property are they lending money in? Are they lending on a condo, a townhouse, a detached home, commercial property, industrial property? The kind of property plays a role in the lender wanting to lend money out to the deal or how much they will actually lend out. They all have their own risk parameters. Number three is the condition of the home, what kind of state is this property in? Is it nicely renovated with hardwood floors and marble countertops or does it need a little work? Now it doesn’t matter what state it is as most private lenders may still give you financing on whatever the state is as they’ll adjust the rate for premium. Number four is loan to value, most lenders will give you a loan to the value of the home and what that means is they will lend you up to ? of the value of the home. If you have a house worth a $1M, the top line they will lend you is $800K because they have a buffer of two hundred thousand to protect their money. Lastly marketability, what is the market and where is the market going? Are there more buyers coming into the city or are there more sellers? That’s a very big determining factor on if a lender will want to lend in this specific area and for how much and what the loan to value is.

So to recap, A and B financing is where they underwrite the client, which is you the borrower. C financing is where they don’t underwrite the borrower, they’ll underwrite the property. Banks are where you’re going to have the lowest rates and no fees usually depending on what your situation is. B financing will take self-employed income and take bruised credit but they do charge a little bit more premium on the rates as well as fees, 1% lender fee and a 1% broker fee. For C financing, they don’t care about your income or your credit as long as the property is good and they’re okay to lend on that property but you’re looking at 6% and above fees.

Check out this video below where I go over all of the content above on a whiteboard – old school style!

If you’re looking to explore your current options in real estate (purchase, refinance, switch), I’d be happy to help you find out what you can get pre-approved for and what’s the right mortgage product for you!

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