Maybe it’s a throw-back to school days, but when we hear the terms A lender and B lender, most people automatically think an A Lender must be better than a B Lender. If there was such a thing as an A++ lender, that’s probably the one we’d be drawn to.
Actually the terms “A Lender” and “B Lender” have more to do with the borrower than the quality of the lender — but, strictly speaking, it still isn’t a rating — a good vs bad sort of judgment. Rather, it simply has to do with what will best fit the needs of the borrower and their unique financial profile or circumstances.
A lenders such as banks and credit unions will only give mortgages to people with a steady, good income and excellent credit. B lenders, including trust companies and mortgage finance companies, will consider more aspects of a borrower’s financial status when determining if they will offer a mortgage, such as their assets. As a result, a B lender mortgage might be a better fit for those who are self-employed or who have a less-than-stellar credit score.
You might have also heard of private lenders. So, what is a private lender? This is a lender who is outside the traditional lending institutions. Private lenders include: mortgage investment corporations, investor groups or individuals. Private lenders are often lumped into the B lender category, but they cater to a specific sub-group of the typical B lender borrowers. Mortgages provided by a private lender are short-term, and, despite the higher fees, might be useful if you need money quickly, for home repairs, to stop a foreclosure or are buying a non-conventional property such as a mobile home, for example.
Pros and Cons of an A Lender Mortgage
A lenders in Canada are chartered banks that are federally regulated, and credit unions that are generally provincially regulated. Most mortgages in Canada are obtained through Canada’s big banks, RBC, TD, Scotiabank, BMO, CIBC, and National Bank, with RBC being the largest mortgage lender in the country.
Benefits of an A Lender Mortgage
- Lower interest rates.
- Possibility of deals, such as benefits, special rates, proprietary loan packages, extended to valued clients of the bank.
- The bank will most likely continue servicing the loan after closing.
Disadvantages of an A Lender Mortgage
- Strict lending standards, such as the stress test, where borrowers must demonstrate they would be able to pay higher interest rates than the actual rate being offered in the mortgage. A lenders will only offer mortgages to those who have a stable income and high credit score.
- Less choice of mortgage options.
- Cross-selling of other bank products such as credit cards or bank accounts.
- Long closing times.
Pros and Cons of a B Lender Mortgage
B lenders provide an option to those who don’t meet the very strict qualifying criteria of A lenders. Because these lenders aren’t so rigorously regulated, they are free to customize their loans to the borrower’s financial situation. This translates to a greater number of appropriate options for the borrower.
Benefits of a B Lender Mortgage
- More options that are tailored to your financial situation. For example, a lower credit score and non-conventional income could be bolstered by other criteria such as equity in a home, a bigger down payment or other assets.
- More lenient and flexible qualifying criteria. For those that don’t meet the strict criteria of A lenders, a B lender mortgage might be a good (or only) solution.
- Usually a shorter term (1 to 3 years as opposed to 5 for a bank) which offers the flexibility to switch to other lending options if your situation changes.
Disadvantages of an B Lender Mortgage
- More expensive: interest rates and closing expenses are often higher than with bank mortgages.
- Requires a higher down payment — usually 20%.
- Often requires a property appraisal, which adds to the costs.
Pros and Cons of a Private Lender Mortgage
A private lender mortgage could be a good solution for specific situations. Usually, people who apply for these types of mortgages don’t qualify for the more traditional ones.
Benefits of an Private Lender Mortgage
- Quick approval process — as little as a couple of days to receive funds in emergency situations.
- Lenient qualifying criteria. As long as you are able to pay the interest, private lenders put more emphasis on the property they are investing in.
- Provide short term loans for: debt consolidation, homes that require maintenance or renovations, as a bridge loan (for example, if you are buying a home, but haven’t yet sold your current property).
Disadvantages of an Private Lender Mortgage
- High interest rate and extra fees.
- Short term loan. While this is also mentioned in the benefits list, it really depends on your situation and the purpose of the loan. The loan usually must be paid off within 24 months, which could be stressful.
Wondering Which Lending Option is Best For You?
If you live in Victoria, BC, Vancouver Island, or anywhere in British Columbia, the best way to find a mortgage option that is specifically tailored to your situation, is talk with us. Auxilium Mortgage’s experts deal with over 50 Canadian and BC lenders, from big banks to smaller credit unions and trust companies. Once we know your situation, we can do the shopping for you, saving you the hassle. We know mortgages inside out — what to look for and what pitfalls to avoid.
Give us a call and we’ll talk.