What is the difference between Alternative Lenders vs Private Lenders?
January 24, 2025 | Posted by: Sherry Corbitt
If you are being offered a mortgage and the term Alternative lender is being said, what does that mean? We commonly break a mortgage into three levels dependent on credit, equity, ability to repay the mortgage, and existing debts in the mortgage industry.
If you do not currently fall into a bank-type mortgage due to the above reasons, you may be offered another solution. This is usually an Alternative lender or a Private (MIC) lender.
Alternative
Typically an Alternative lender still has tight guidelines that they follow regarding your ability to repay the mortgage. This is called GDS and TDS: Gross Debt Service (mortgage payments, property taxes, and heating costs per month) and Total Debt Services (mortgage payments, property taxes, heat AND all other debts like car loans, credit cards, loans, etc.). They want to understand your employment and the income that comes into the home. They are flexible on more creative options that a bank may not consider, such as looking at Child Tax Credit, recently established child or spousal support, and additional income from another adult in the home but who isn’t on the mortgage (this is called Contributor income). These lenders are very sensitive to the equity in the house and rarely will consider a mortgage over 80% Loan-to-Value of your home. For example, if a home is worth $500,000, it will go to $400,000.
Rates are usually between 4-6%, setting up fees of 1-2% of the mortgage balance. In addition, you will pay for your lawyer and an appraisal (approximately $1500). They will allow for property and income tax arrears but frown on mortgage payments currently in arrears. Clients currently in consumer proposal or bankruptcy can be worked with to payout.
Private Lender/MIC (Mortgage Investment Corporation)
These lenders have a much higher risk tolerance and focus mainly on the equity in the home, not the client’s income or credit situation. Some lenders do not even ask for income documents or proof that income taxes are outstanding. The max loan-to-value is almost always 90% but most like to only go to 80%.
Rates start at 6.50% and go up from there, depending again on the equity and home. Typical fees will be between 3-5%, and you will pay for both their lawyer (typically $1100-2000) and your lawyer. Appraisals are always needed.
These are usually shorter terms: 6 months to 2 years with renewal fees if you need a longer-term at renewal. The goal of these lenders is to be a bridge to help you rebuild or fix whatever your concern is and move you up into an Alternative lender at renewal. Their goal is not to lend you money indefinitely so that you better your situation and move forward.
Both an Alternative lender and a Private lender are interested in understanding your story: Why are you in need of their solution? Job loss? Illness? Hardship? Divorce? Or just a hiccup on your journey? They also need to know our exit strategy and how we plan to get their money back. For example, are you going to sell? Is your employment/income going to be changing? Will your credit be repaired?
Our team’s job is to help understand the property’s worth, the story of how the situation happened, and how we plan to move you forward into a better place and then match-make you to the lender and mortgage that best suits your situation current needs and your future dreams.
Sherry Corbitt, Mortgage Broker
