First, let’s understand the difference between “classes” of mortgages:
As mortgage professionals, we refer to the 3 major tiers of lending as; A lender mortgage (or ‘A’ bank mortgage), B lender mortgage, and private lender mortgage. If this terminology sounds familiar, it’s because, over time, these terms have become quite mainstream, even beyond industry professionals. Over many years, the Mortgage landscape has transformed beyond the typical ‘A’ (“bank only”) lending solutions to include alternative options. These alternative mortgage financing solutions appeal to those homeowners that often require more flexible consideration to fulfill their mortgage financing needs, be it a purchase, a refinance or equity take out.
In simple terms:
A lender mortgage (or Bank mortgage): Refers to any mortgage funded through traditional lending sources (i.e. major banks or tier-A broker channel banks) – What comes to mind might be – ‘stricter approval guidelines’ and ‘best mortgage rates.’
B lender mortgage: Refers to any mortgage funded through non-traditional banks/lending sources, but still governed by B-20 guidelines (i.e. Trust companies, tier B banks, monoline institutions & credit unions) – What comes to mind might be – Common sense lending approach with much more flexibility in affordability and types of income used. Rates are reasonably priced in consideration of the flexibility that is offered.
Private lender mortgage: Refers to mortgages funded through sources not governed by B-20 (i.e. Mortgage Investment Corporation (MIC), numbered company/registered corporation, or individual lenders) – Private lenders are primarily interested in the equity available to secure their mortgage, and less interested in the qualification used by regulated banks. Rates are considerably higher but offer the greatest level of flexibility with the least amount of “red tape”. Private mortgage solutions can save when in a bind as they can become the path of least resistance with a very quick funding turnaround.
Pros and Cons of a ‘B lender mortgage’:
The benefits and “things to consider” can vary from the perspective of one client, so to keep things simple, we’ll limit the pros and cons of a B lender mortgage to 3 major points for each.
- A ‘B lender mortgage’ offers a clear solution for clients who need mortgage financing but do not qualify through traditional banks for reasons such as nature of income, high debt servicing ratios (affordability), previous mortgage arrears, poor/blemished credit, past bankruptcies or consumer proposals, non-traditional down payment sources, etc.
- A “B lender mortgage” is typically funded on 1-to-3-year terms (rather than 5-year terms) offering the borrower future flexibility to improve their circumstances and easily transition back to traditional lending sources, without hefty penalties.
- B lender mortgages are less stringent on qualification guidelines and allow much more leniency on; debt servicing ratios (thus allowing higher mortgage affordability), less than perfect credit scores, non-conforming sources of income (ex. Business-for-self, commission, bonus, part-time or contract employees) and varying down payment sources.
- It’s no secret that a B lender mortgage comes with a higher price tag in 2 ways: Interest rate and mortgage closing costs. Given that these options are often short-mid term solutions, that serve an immediate mortgage financing need, the trade-off can be considered “worth it”.
- A ‘B lender mortgage’ often requires a property appraisal for all mortgages (regardless of purchase or refinance) whereas A lender mortgages do not (or at least do not 50-60% of the time). We wouldn’t refer to this explicitly as a con… but it is an added cost of closing. It’s worth mentioning that the cost of an appraisal is often towered by every other cost associated with closing on a home. As a bonus, Homeowners like to get reassured that the home they are buying is actually worth what they were willing to pay. (Note: Since home prices have grown so much in such a short period, we find that A lender mortgages are requiring appraisals more often than in previous years – making this less of a con than it once was).
- A ‘B lender mortgage requires a minimum down payment of 20%. For refinances, this often isn’t a hurdle for borrowers. However, for purchases, it can easily affect buyers drastically if the buyers planned only for the minimum down payment requirements of 5%, 10%, or even 15%. Considering that average home prices in major cities across the province are approaching “uninsurable” territory…a 20% down payment might be necessary across all tiers sooner than later. This too makes this point less of a con than in the years prior.
You might have noticed that, unlike “A” lenders who advertise their insured mortgage rates, B lenders do not typically publish their mortgage rates to the public, and this is primarily done for the following reason: B lender mortgages take a tailored approach to your application. They consider unique situations surrounding the borrower’s circumstances to provide the most reasonable mortgage that they can offer.
If you’re worried about getting the best B lender mortgage rates – don’t worry – we’re incentivized to get you the best mortgage rates with the most reputable B lenders in the space. We’ve been working with these lenders long enough to know exactly how they price your application, so let’s chat and we’ll walk through your options together – (905) 455-5005.