When is alt-lending the right solution for clients?
| CMP Featuring Jared Stanley May 10, 2022 |
When is alt-lending the right solution for clients?
This article was originally published on Canadian Mortgage Professional
When it comes to finding the right mortgage solution for a client, it goes without saying that a broker’s responsibility is to innately understand the variety of options available – and the scenarios that are best served by different types of lending.
In situations where a borrower is urgently in need of financing, two traits above all make alternative lending a strong solution for borrowers, according to Neighbourhood Holdings’ senior director of originations Jared Stanley: the speed and convenience we can offer.
That need for quick financing can come down to several different reasons. Yet in each, the ability of lenders like Neighbourhood Holdings to turn around deals rapidly means that an alternative option can be an excellent choice.
“Speed is the thread that connects most alternative scenarios,” Stanley told Canadian Mortgage Professional. “If a borrower needs financing fast, an alternative lender is their best bet. For instance, it’s not uncommon for us to close a deal within several days. Brokers and their clients are sometimes astonished at how fast we can complete a file.”
Pre-sale purchases
Among the most common scenarios where alternative solutions come to the fore is closing on a pre-sale purchase, Stanley said – particularly because alt-lenders including Neighbourhood have the ability to lend off the property’s current value rather than the original purchase price.
That’s useful in the event of unforeseen events such as construction delays or life changes between the pre-sale contract signing and the deal’s completion. “In some cases, they aren’t in the financial position they thought they would be,” Stanley explained.
“Fortunately for many, their pre-sale properties have appreciated substantially in value. Our financing enables them to close on their pre-sale, resell the property if needed, and capture that equity.”
Business-for-Self
The ability to secure quick financing through alternative solutions can be especially useful among Business-for-Self borrowers, who may face income verification issues as lenders request a slew of documents before committing to the loan. In today’s hectic housing market, with strong competition and often narrow closing windows, that can be a real issue for self-employed homebuyers.
“Quick closing windows combined with endless required documentation are two variables that exacerbate this issue,” Stanley said. “Business-for-Self borrowers can feel like they are jumping through hoops and that the goalposts keep being moved on them to obtain bank financing. Meanwhile, their subject removal or completion date remains fixed, and they are running out of time.”
It is becoming commonplace for brokers to recommend an alt-lender if borrowers need short-term or bridge financing. These borrowers who close a purchase with an alt-lender generally gravitate toward a bank lender several months down the line.
“People often use alternative options for that short-term solution – speed, efficiency and convenience,” he said. “It secures them that property they really want and then enables them to get their ducks in a row.”
Irregular income
Where borrowers may have irregular and unestablished income – for instance, if part-time gig economy earning sources aren’t included as part of total income – alternative options can also play an important role, Stanley said. He pointed out that policymakers can miss the mark and create rules that “aren’t aligned with reality,” creating inefficiencies and leaving creditworthy borrowers behind.
“I don’t think policy adequately addresses hardworking gig economy workers,” he said. “For example, a person with a salary of $60,000 can drive an Uber part-time and earn an additional $25,000 per year, which is over 40% of their full-time income.”
Other scenarios
Brokers also often look to alternative solutions for their client where divorce and separation are concerned, Stanley said – for instance, if one party doesn’t have sufficient income to support the property in their name.
Family matters, such as relatives wanting to transfer properties to loved ones for estate planning purposes, and debt consolidation (for example, if the borrower’s Beacon score is impacted by high debt levels) are other scenarios where alternative lending can provide an effective option.
Finally, alternative solutions are common where issues arise for rental investors over the number of doors they own, or in private sales where traditional bank lenders are often warier than when dealing with other transactions.
What brokers need to know
Stanley said a holistic and common-sense approach is a basic requirement to consider yourself an alternative lender. Still, he added that Neighbourhood’s value proposition was transparency – a “core operating principle” that commits the company to straightforward pricing and setting clear expectations.
“Like airline pilots navigating turbulent air and bad weather to give passengers a safe flight, our team proactively identifies issues before things get bumpy,” he said. “For us, it’s become so normal to close deals quickly that they don’t faze our team.”
That means constant communication with brokers to let them know the status of the file, some of the issues that might cause problems or delays down the line, and expected timescales for completion. “It’s just advising them and conditioning appropriately,” Stanley said.
Using technology like Lender Spotlight to narrow searches can help brokers understand the niches and specialties of different lenders, Stanley said – and branching out and making alternative lender connections are also vital practices for brokers.
“The easiest way to do this is by speaking with BDMs, discussing your files, and asking them what solution they could have provided,” he said. “Using a customer story or case study on a BDM instead of a live deal is a low-stress and efficient way to do a trial run of a lender.”