What Is a B Lender Mortgage?

May 20

B Lender Mortgages

B lenders, also known as alternative lenders, typically cater to borrowers with less-than-perfect credit scores or unusual income sources. Although B lender mortgages might come with slightly higher interest rates and fees than those offered by A lenders, they can provide mortgages for people who may not meet the strict lending criteria of traditional banks.

A B lender mortgage is a mortgage option provided by lenders that are in between traditional banks (A lenders) and private lenders (borrowing money from a single person or group of people).

A Lenders

A lenders are typically banks, credit unions, and some mortgage finance companies (MFCs) that cater to people with strong credit histories and stable incomes. They often offer lower interest rates and more favourable terms.

B Lenders

B lenders, on the other hand, are alternative lending options for people who do not meet the criteria of A lenders. They tend to cater to borrowers with:

Business for Self Income
Lower credit scores
Inconsistent income
Employment history gaps
Recent bankruptcy or consumer proposal

While you might pay a higher interest rate with a B lender, they can be more flexible in their lending criteria, offering solutions tailored to your unique financial situation.

A Lenders vs B Lenders

A lenders are often your traditional, big-name banks and B lenders are often lesser-known lenders that exist purely for mortgages.

However, some banks and mortgage companies are both A lenders and B lenders. An A lender might have a B lending division and vice-versa, so just because your lender is a “B lender” it doesn’t necessarily mean you have a B mortgage.

Examples of A Lenders

Major banks like RBC, CIBC, BMO, Scotia Bank, TD, National Bank
Credit Unions like ATB, Servus Credit Union, Canadian Western Bank and Connect First
Monoline lenders like MCAP, RMG, First National, Merix, CMLS, RFA, Strive Financial and Home Trust

Examples of B Lenders

Home Trust
RFA Capital
First National Excalibur
Equitable Bank
Community Trust
Haventree Bank
ICICI Bank

B Lender Mortgage Requirements

Credit Evaluation

Before approving a mortgage, B lenders evaluate your creditworthiness. They'll closely examine your credit report, which includes your credit score and credit history.

While B lenders are more flexible than A lenders, having a credit score above 600 is generally favourable. To help your credit score, ensure you have a history of timely payments and responsible credit usage.

That being said, in many cases B lenders will approve a deal with credit as low as 400. It is important to note that your rate is likely to be higher with a very low credit score as B lenders use what is called "risk-based pricing."

The higher the perceived risk, the higher the rate. In the case of credit scores, high scores typically mean less risk and result in lower rates.

Income Verification

Like any other mortgage, B lenders require proof of your income to ensure you can afford the mortgage. They typically request employment letters, pay stubs, tax returns, or bank statements as verification.

If you're self-employed or work irregular hours, make sure that you're able to present your bank statements to the lender. B lenders may be more willing to work with borrowers with unconventional income sources as long as they see stability and ongoing income in the bank statements.

In fact, for business-for-self clients, usually, B lenders focus solely on the last 6 months' bank statements to prove the income in the company.

As a result, there are tax advantages to using a B lender. Many business-for-self clients want to optimize their tax strategy by paying themselves a low salary from the business.

They are happy to pay a higher rate for their mortgage to avoid the 40% tax bill on their personal income.

Down Payment

The minimum down payment varies among B lenders, but it needs to be at least 20%, with some requiring up to 35%. Because B lenders accept people with lower credit scores and income history, they rely on a higher down payment to ensure that there is a solid equity position in the property.

Without 20% down payment, your mortgage deal would need default mortgage insurance. Default mortgage insurance is only available to borrowers using an A-lender, as such, without 20% down payment a B Lender will not be an option for your mortgage.

Down payment of 20-35%: More widely accepted by B lenders
Down payment below 20%: Unable to secure a B mortgage

Collateral

If you can’t meet the minimum down payment, increased collateral may improve your chances of mortgage approval. If you or your co-signer owns another property, the B lender may want to put a blanket mortgage across both properties.

This is a lien on the title of the home you're purchasing and the home you already own. Remember, if you default on your payments, the lender can repossess both the home you purchased and your additional collateral.

B Lenders are much more concerned about the property than A lenders. As a result it might be more difficult to use a B Lender if the property is:

A condo built before 1990
A rural property
Outside of a major centre
A condo smaller than 500 square feet
A home smaller than 1,000 square feet

Pros and Cons of B Lender Mortgages

Advantages of B Lender Mortgages

With a B lender mortgage, you can often secure financing if your circumstances do not meet the criteria of traditional banks. These lenders are more flexible and may offer you:

Alternative income verification: If you have irregular income, are self-employed, or have a small business, B lenders are more likely to approve your mortgage application by considering alternative income proofs.

Credit history leniency: B lenders may still consider you eligible for a mortgage even with past credit challenges or low credit scores, as long as you can show improvement and stability.
Refinancing options: If your existing mortgage agreement includes high-interest rates or unfavourable terms, B lenders can provide refinancing options to help you lower your monthly payments and improve your financial situation.
Access to faster funding: B lenders often have faster processing times than traditional banks, which can be beneficial if you need to quickly secure financing or meet a specific deadline.

Limitations of B Lender Mortgages

Despite the benefits, there are some drawbacks to consider when choosing a B lender mortgage:

Higher interest rates: B lenders typically have higher interest rates than traditional banks, which can translate to higher overall borrowing costs.

Additional fees: You may encounter additional costs, such as higher closing fees, lender fees, or administrative fees, when working with a B lender.
Shorter mortgage terms: B lenders often offer shorter mortgage terms, usually around 1-3 years, whereas a typical mortgage has a 5-year term. This means you may need to renew more often, potentially incurring additional costs.
Stricter mortgage conditions: B lender mortgages may have more stringent conditions, such as a higher down payment requirement or less flexibility with pre-payment options.

In summary, while B lender mortgages can provide an opportunity to secure financing when traditional banks are not an option, it is essential to weigh the benefits and drawbacks before deciding how to proceed. Considering your unique circumstances and needs is crucial when selecting a lender for your mortgage or refinancing process.

Refinancing and Renewals

Refinancing with a B Lender

When considering refinancing options, you might explore B lender mortgages. As a borrower, this can offer you an alternative lending option if you face challenges in securing a mortgage with an A lender.

Refinancing with a B lender may help you consolidate your debts, improve your credit, or even secure lower interest rates. While refinancing with a B lender can potentially offer you lower interest rates, it's important to compare your options carefully.

B lenders typically have higher interest rates compared to A lenders but may have more flexible lending criteria. This means you could still save money in the long run if their terms are more favourable to your financial situation.

Keep in mind that B lenders often charge higher fees, including application, referral, and renewal fees. Ensure that you assess your potential interest savings versus these additional expenses.

Renewing a B Lender Mortgage

When your B lender mortgage term is nearing its end, you'll face the renewal process. This is an opportunity to reassess your financial position and consider various options, including switching to an A lender if your credit situation has improved.

At the time of renewal, you have several choices:

Renew with your current B lender: If you're satisfied with their services and rates or your financial situation has stayed the same, you may choose to renew with your existing B lender. Just be aware of any additional fees or increased interest rates they may impose. Protip: Work with a mortgage broker at your
Switch to an A lender: If your credit score has improved and you meet the lending criteria of an A lender, making the switch could save you money in the long term due to their lower interest rates.
Consider another B lender: If you're unhappy with your current lender's terms but still do not qualify for an A lender, it might be worthwhile to explore other B lender options to find a more suitable match for your needs.

How to Change from a B Lender to an A Lender Mortgage

The main ways you can switch from a B-lender mortgage to an A-lender mortgage are:

Improve your credit
Increase your income and keep it consistent
Reduce your debt load

To move from a B-lender mortgage to an A-lender mortgage, you need to improve your credit score. Start by paying your bills on time and in full, demonstrating responsible financial management.

Make sure to keep your credit utilization low, ideally below 30% of your credit limit. Avoid applying for new loans or credit cards, as frequent credit inquiries can lower your credit score.

You should also monitor your credit report for any inaccuracies and dispute them if necessary. Maintaining these practices will improve your credit score over time, increasing your chances of qualifying for an A lender mortgage in the future.

A lender mortgages require that you have a stable and reliable income. To demonstrate this, maintain a consistent employment history and avoid job-hopping.

Make sure to have a solid income-to-debt ratio, as this shows A lenders that you are capable of handling the financial responsibilities associated with a mortgage. It's crucial to have all your financial documentation in order, including tax returns, pay stubs, and bank statements, to provide evidence of your income and ensure a smooth transition to an A lender mortgage.

By focusing on improving your credit score and maintaining a reliable income, you increase your chances of successfully transitioning to an A-lender mortgage, which typically offers better interest rates and terms than a B-lender mortgage.

Working with a Mortgage Broker

A mortgage broker is an intermediary between you and the mortgage lenders. They can help you find the right B lender mortgage best suits your needs.

To compare the most current rates for B lender mortgages, apply online or contact the brokers at Spire Mortgage today.

Renee Huse