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Not all time is a time for banks. This is a lesson that many Canadian homeowners learn the hard way. An application to the bank is rejected. A credit score falls short. Income looks complicated on paper. Suddenly, the plan falls apart.
A bank’s “no” however, does not have to be the end of the road. Today’s homeowners have more options than they realize. The choices are explained and discussed in this guide.
Why Banks Say No
Banks have rules that they have to stick to. They can’t even bend them, not even for good customers. Denial is common when someone experiences any of the following:
- A credit score below the bank’s minimum.
- The income from self employment that is difficult to substantiate.
- Late payments/collections in recent times.
- Too much debt.
- A house that does not meet the typical requirements for loans.
All of these reasons do not exclude the possibility of options for the homeowner. They simply indicate that the bank isn’t the ideal spot.
The Value Sitting in Your Home
Over the years, the majority of Canadians have grown their equity in their homes. In many areas, home prices have been steadily climbing. Equity is a real value, whether it’s in a bank account.
This equity can be turned into a financial instrument. It can help with debt, emergencies, renovations or unexpected expenses. The important thing is to secure a lender that will take a look at a property, not simply a credit report.
Alternative Lending Options
There are a number of options for financing outside of the banking system. The most crucial ones homeowners need to be aware of:
Private lenders
These lenders don’t look at the credit history, but at home equity. Approval can occur much quicker than a bank.
Credit unions
A little more flexible than large banks, but also subject to some of the same regulations.
Mortgage investment corporations
Collection of investors who finance loans against real estate.
Second mortgages
A loan that is obtained on top of a mortgage, with funds from the equity in the home.
Private mortgage lending has been increasing in Quebec and the rest of Canada. Companies like Lauréat Finance are in this niche and provide home equity loans rather than credit loans. This is indicative of the general trend in the industry and as the speed and flexibility becomes as important as the approval criteria.
What Makes Private Lending Different
Private lenders are not like banks. Knowing the difference helps homeowners make their choices:
Speed: Not weeks, within two days, for some private loans.
Flexibility: Approvements can be based on home equity more often than on credit score.
Loan range: A private mortgage could be as low as a couple of thousand dollars and up to more than C$1,000,000 depending on the lender and the property.
Short-term focus: There are many private loans that are set up to be a bridge loan and not a long-term loan.
This is not to say that there’s a place for private lending in every situation. It just implies it is an alternative that deserves to be known.
Questions to Ask Before Borrowing
There are several questions homeowners might want to ask themselves before selecting any financing method:
- What is the equity value in the property?
- What will be the total amount of the loan including the fees?
- What is the length of the loan?
- What are the consequences for non-payment?
- Is this a temporary band aid or a permanent solution?
It helps to avoid financial stress later on, to answer these honestly.
Making the Right Choice
For every homeowner, there is no one answer for what is the best solution. A young family is different from a retiree consolidating debt when it comes to kitchen remodeling. The best route will vary based on objectives, timeframe and risk tolerance.
The most important thing is to be aware of options. A rejected bank application doesn’t have to be a dead end. It is just one among a number of doors.
Final Thoughts
Many people don’t realize that homeownership means they have more financial power than they do. The equity accumulated over the years of mortgage payments can be a valuable asset during tough times. Traditional banks are one way, but not the only way.
Knowing about other lenders, including credit unions, can put homeowners in control of their finances. The better the outcome the more informed the decision.
