Qualifying for a Prime Rate, Alternative Or Private Mortgages. The Pros & Cons of Each
Introduction:
In this podcast transcript, hosts Seun Adeyemi and Arthniel Lichmore delve into the topic of mortgages, specifically discussing the differences between prime rate lenders and alternative lenders. They analyze a client scenario where the broker recommended an alternative lender, while the client found lower rates at a traditional bank. The hosts aim to shed light on why brokers may suggest alternative lenders and whether borrowers are being tricked into higher interest rates.
Seun: Podcast Introduction
Seun Adeyemi introduces the Wealth Thank You Podcast and welcomes his co-host, Arthniel Lichmore. They proceed to discuss a specific client scenario involving mortgage options and decide to unpack it further.
Othneil: The Client Scenario
Othneil shares the story of a client who consulted a mortgage broker and was recommended to consider an alternative lender with a higher interest rate. However, the client later discovered lower rates at their local TD branch. This led the client to question why the broker suggested a higher rate when traditional banks appeared to offer better options.
Seun: Understanding the Broker’s Perspective
Seun explains that brokers always aim to secure the best interest rates for their clients. They typically explore prime rate lenders, including major banks, before considering alternative lenders. The decision to recommend an alternative lender is based on factors such as the client’s income and debt-to-income ratio.
Othneil: Prime Lenders vs. Alternative Lenders
Othneil inquires whether prime lenders are more strict than alternative lenders. Seun confirms this and elaborates on the criteria prime lenders use to determine mortgage approvals. These lenders thoroughly analyze a client’s financial situation, including their income, job stability, and credit score, to assess the risk involved in granting a mortgage.
Seun: Factors Influencing Mortgage Options
Seun highlights that if a client is putting less than 20% down payment, they typically require an insured mortgage. This means an insurer backs the mortgage, and the lender must meet specific criteria established by the insurer. The more extensive analysis by prime lenders helps ensure the accuracy of the borrower’s declared income and assess their job stability.
Othneil: The Role of Due Diligence
Othneil questions whether the extensive information-gathering process conducted by lenders is justified or simply a way to appear thorough. Seun asserts that lenders need to assess the risk profile of borrowers, and different lenders have varying risk appetites. Gathering detailed information helps lenders evaluate whether the borrower is qualified and reduces the risk associated with granting the mortgage.
Seun: The Importance of Accurate Information
Seun emphasizes the significance of accurate information when applying for a mortgage. Lenders want to verify that the borrower’s stated income aligns with their tax records. They aim to ensure borrowers are not overestimating or underestimating their income, as this impacts the risk involved in lending to them.
Creditworthiness and Missed Payments:
Seun highlights the significance of creditworthiness when applying for a mortgage. Lenders scrutinize payment history, and missed payments on credit cards or loans can raise doubts about an individual’s reliability. This concern stems from the question of whether someone who has missed payments in the past will fulfill their mortgage payment obligations. Othneil acknowledges this point and suggests that lenders often hesitate to work with borrowers who have a history of missed payments.
The Role of Alternative Lenders:
Seun explains that alternative lenders tend to be more lenient in assessing creditworthiness. While traditional lenders focus on pristine credit scores, income qualifications, and tax records, alternative lenders consider individual circumstances and may be more willing to approve mortgages for borrowers with lower credit scores, even as low as 550 or 500. These lenders take into account life events such as divorces or unique credit situations. However, it is important to note that alternative lenders may require explanations for financial difficulties or missed payments.
Navigating the Mortgage Process:
Othneil emphasizes the role of mortgage brokers in presenting clients in a favorable light to lenders. Mortgage brokers aim to provide lenders with a comprehensive understanding of a borrower’s story, including the reasons behind missed payments or other credit challenges. By contextualizing the borrower’s financial history, brokers can increase the chances of securing mortgage approval, especially on the alternative lending side.
The Importance of Written Commitments:
Seun advises borrowers to obtain written commitments from lenders to ensure clarity and avoid last-minute surprises. While lenders may verbally promise a mortgage approval, these promises are often conditional and subject to meeting specific criteria. By requesting a written commitment, borrowers gain a better understanding of the conditions they need to fulfill to secure the mortgage successfully.
Potential Challenges and Due Diligence:
Seun mentions instances where mortgage applications encounter difficulties close to the closing date due to issues with the down payment or the traceability of funds. Anti-money laundering rules necessitate a 90-day history of the source of funds, which can become problematic if funds are from various sources or international transfers. If the lender finds the file too risky due to such issues, alternative lending options may come into play.
Conclusion:
Understanding the mortgage approval process is crucial for individuals seeking homeownership. While traditional lenders prioritize pristine credit histories, alternative lenders offer more flexibility, taking into account individual circumstances. Mortgage brokers play a vital role in presenting borrowers favorably to lenders. It is advisable for borrowers to obtain written commitments to ensure transparency and avoid surprises. By exploring alternative lending options and working with knowledgeable professionals, borrowers can increase their chances of securing a mortgage that suits their needs, even with less-than-perfect credit histories.