Alternative financing takes various forms, primarily designed for individual homeowners dealing with a power of sale, foreclosure, or unexpected expenses. Unlike more traditional loans that focus on stringent requirements, private mortgages and loans have a different process based on the percentage of the property you own or the equity.
Overview of Alternative Financing Methods
Alternative financing methods are an excellent choice for people with less-than-perfect credit scores and alternative sources of income. A private lender has a more streamlined application process if you’re looking for bad credit mortgages, debt consolidation loans, second mortgages, and other products.
Understanding the difference between these alternative financing methods and traditional ones can be helpful, especially for people in financial difficulty.
Comparing Traditional and Alternative Financing
There are significant differences between traditional financing methods like banks and credit unions and alternative financing from private lenders. Alternative funding has quicker approval times and more flexible terms than its conventional counterparts.
The Regulations
Private lenders usually work with mortgage agents and licensed mortgage brokers. These brokers must be licensed to operate legally in Ontario. They are registered and licensed by a government agency called the Financial Services Regulatory Authority (FSRA).
Traditional lenders are the banks that have different requirements, including a good credit score and stable verifiable income.
Interest Rates
With an alternative lender, the interest rates are often higher to offset the risks they take to supply loans. Private lenders use what’s called the loan-to-value (LTV) ratio. This formula marks a big difference in how private lenders calculate interest rates compared to traditional banks and credit unions. For an LTV ratio, alternative lenders divide the amount of the mortgage that has been requested plus any existing mortgages by the appraised value of the home.
Banks focus on a credit score and verifiable income, and their criteria for determining an interest rate are more strict.
The Focus
Overall, there are different focuses between the two. Traditional financing typically requires a higher credit score. If you want to improve your score to get one of these loans, you should know that on-time payments account for approximately 35% of your score. According to Equifax, the balance you owe, as opposed to your total available credit, also counts for 30%.
Along with verifiable income, traditional banks are also looking for a debt-to-income ratio within acceptable limits. This measures the portion of a borrower’s gross income used to cover their debts. Traditional lenders typically assess the gross debt service ratio, which represents the percentage of income allocated to housing costs such as mortgage payments. Additionally, they evaluate the total debt service ratio, reflecting the percentage of household income utilized for loans and credit cards.
Private lenders prioritize the Loan-to-Value (LTV) ratio and the property’s equity. Equity is the portion of the property that the homeowner owns outright, separate from the remaining mortgage. Many private lenders will allow for a maximum of 75% LTV that comes with over 25% equity. The LTV is a formula comparing the amount of a requested mortgage against the appraised value of the property, home, or other asset.
Simply put, the LTV ratio is the percentage of the property’s value owed in mortgages. If a homeowner has a home worth $1,000,000 with a $500,000 first mortgage and is requesting a $250,000 second mortgage, the LTV ratio for the requested mortgage can be up to 75% of the property’s value.
How to Choose the Right Financing Option
Deciding between the two means involves working through a few different considerations. For example, if you’ve got a good credit score, an employment history, and a steady income, traditional financing might be better for you.
You might want to choose a traditional lender like a credit union or bank if a lower interest rate is a deciding factor. Remember, these conventional sources have many different resources at their disposal so that they can provide loans at competitive interest rates.
However, there’s a longer application process involved and slower funding times.
Alternative lenders, also known as private lenders, depend on the equity built up in a property. Equity is the amount of property that a homeowner owns, and it’s the difference between the outstanding balance on the mortgage and the current market value of the place. Alternative lenders look for 25% of equity that’s being built up, which can be used as collateral.
Case Studies of Successful Alternative Financing
David B. (not a real name) contacted Mortgage Broker Store to get help paying off high-interest credit cards and other bills. Due to his employment situation, traditional Banks refused to lend him more money.
When he contacted us, we helped them fill out an application for a second mortgage. They owned a property in Oshawa that was worth around $860,000. David had an existing mortgage worth $455,000. He asked for a second mortgage in the amount of $80,000. This put David’s loan-to-value ratio at 65%. The loan-to-value ratio is the formula used to calculate the percentage value between the mortgage requested and the equity a client has.
David got the money and some relief from his high-interest debts.
Are You Looking for Alternative Financing Options in Ontario?
Mortgage Broker Store handles private mortgage-related products, including bad-credit mortgages. One specialty is applications that don’t meet conventional lending requirements. Our team of private lenders, brokers, and licensed mortgage agents can help. We can also help you get a loan that can stop a power of sale or foreclosure.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
