Subprime Mortgage

Why You Might Choose a Subprime Mortgage

The biggest benefit of a subprime mortgage in Canada is that it helps you close the deal. If prime lenders have turned you down, you might have no choice but to get your mortgage originations from a subprime lender or B lenders.

Reverse mortgages have become increasingly popular for Canadian homeowners over 55 years old, looking to boost their cash flow. Credit score is not an important factor for this product.

Understanding the Benefits of Subprime Mortgages in Canada

Subprime mortgages in Canada have garnered a significant amount of attention in recent years. While the term 'subprime' might spark memories of the 2008 subprime mortgage crisis in the United States, the Canadian subprime environment operates in a slightly different manner. Despite carrying a bigger risk due to their nature, these types of loans can offer several benefits to a subprime borrower.

A Lifeline for Subprime Borrowers

Subprime mortgages are designed primarily for individuals with poor credit scores, often due to factors like bankruptcy or consumer proposal. These individuals are considered 'a subprime borrower', a term coined because they don't meet the stringent credit score and credit history requirements of traditional lenders such as banks.

For these individuals, securing a mortgage loan from traditional banks can be an uphill task. This is where subprime mortgage lenders step in. These lenders, including private mortgage lenders and alternative lenders, are more flexible with their credit rating criteria, and require fewer mortgage backed securities, making them an ideal solution for people with poor credit history.

Credit Unions and Subprime Mortgages

Unlike traditional banks, credit unions are member-owned and often more community-oriented. This makes them more likely to consider the individual circumstances of a subprime borrower, rather than just the numbers. However, while some credit unions do offer subprime loans, their rates and terms can still be prohibitive for many borrowers.

The Role of Mortgage Brokers

A mortgage broker can play an instrumental role in assisting subprime borrowers in navigating the subprime mortgage market. They can help find the right subprime mortgage lender, ensuring the borrower receives the best possible terms and interest rates. Furthermore, they have a keen understanding of the mortgage market and can provide personalized advice to subprime borrowers.

Private Lenders and the Subprime Mortgage Industry

Private lenders are a significant part of the subprime mortgage industry in Canada. They offer mortgages to individuals with bad credit who are otherwise unable to secure loans from traditional lenders. This category of subprime mortgage lenders tends to charge higher interest rates to compensate for the greater risk they take on with these loans.

Potential for Credit Score Improvement

While subprime mortgage rates are typically higher than prime mortgages due to the higher risk associated with a poor credit score, they can offer a silver lining. Regular, on-time payments can positively impact a borrower's credit score. Over time, this can improve their credit history and potentially lead to better loan terms in the future.

Flexibility in Payments

A subprime mortgage often come with the option of interest only mortgage payments. This means that monthly mortgage payments for a certain period consist only of the interest on the loan, not the principal. This option can significantly reduce the monthly payment, making it more manageable for subprime borrowers.

However, it's crucial to note that while interest only mortgages can lower initial monthly payments, the principal will still need to be paid eventually. This could result in higher monthly payments down the line.

Risks and Considerations

While subprime mortgages can offer a lifeline to many borrowers, they are not without risk. The higher interest rates and potential for variable rate changes can lead to higher monthly payments, and if not managed properly, can lead to financial strain. As such, it's advisable to consult with a personal finance writer or professional before making a decision.

While the subprime mortgage environment in Canada carries inherent risks due to the association with lower credit scores and higher interest rates, it also presents opportunities. For those struggling to secure a loan due to a low credit score or past bankruptcy or consumer proposal, subprime mortgages can provide a path to homeownership and credit improvement.

The Subprime Mortgage Application Process

The world of subprime mortgages in Canada can seem complex, but with the right knowledge and guidance, the application process can be navigated smoothly. Here, we delve into the step-by-step process that subprime borrowers in Canada typically go through, from finding a lender to finally closing the loan.

Tips for applying for a mortgage:

Identify Suitable Lenders

First and foremost, a subprime borrower need to identify suitable lenders. While traditional banks, including Canada's chartered banks, and major banks might be the first port of call for a prime borrower, they often have stringent requirements that make it challenging for those with bad credit to secure a mortgage loan.

In such instances, a subprime borrower might consider B lenders, such as a credit union, trust companies, or even private alternative lenders. These financial institutions are often more willing to work with those who have lower credit scores, providing an alternative for many lenders wary of working with borrowers with a history of bad credit.

Self-Employment and Subprime Mortgages

Self-employed individuals, who might face difficulties proving their income, can also benefit from subprime mortgages. While traditional mortgage providers often require proof of stable employment history, subprime lenders are more flexible. They can consider self-employment income, even if it fluctuates, which is particularly beneficial for Canada's growing self-employed population.

Understanding How Subprime Mortgages Work

Before proceeding with an application, it's essential for potential borrowers to understand how subprime mortgages work. Unlike traditional mortgages offered by major banks, subprime mortgages are designed to accommodate borrowers with lower credit scores or those recovering from financial crises.

They often carry higher interest rates to compensate for the higher risk taken on by the subprime lender. However, with careful financial planning, subprime mortgages can be used effectively to purchase a home, even allowing for lower monthly payments through strategies like longer loan terms.

Applying for a Subprime Mortgage

Once a potential subprime borrower identifies a suitable lender, the next step is to apply for the mortgage. This typically involves providing documentation to demonstrate their ability to repay the loan. This could include proof of income (including employment income), assets, debts, and other financial obligations.

While subprime lenders are more flexible with credit scores, they still require evidence of financial stability. It's also important to note that a down payment will be required, the size of which can vary depending on the lender and the specific circumstances of the borrower.

Closing the Loan

If the application is approved, the final step is closing the loan. At this stage, it's crucial to understand the terms of the mortgage, including the interest rate, the payment schedule, and any potential penalties for late payment or early repayment of the loan.

A Note on Canada's Housing Market

While the subprime market has made home ownership more accessible to many Canadians, it's essential to note that Canada's Real Estate market has its own unique set of challenges and risks. As such, it's advisable to consult with a mortgage professional or financial advisor before deciding on a subprime mortgage to avoid any future financial crisis.

While the application process for subprime mortgages Canada might seem daunting, understanding how subprime mortgages work, the role of different lenders, and the specific requirements can make it significantly more manageable. Despite the risks associated with subprime lending, these mortgages can provide a lifeline for those struggling to secure a mortgage through traditional means.

Frequently Asked Questions About Subprime Mortgages

When should I consider a subprime mortgage?

If you've been turned down for a mortgage by your traditional bank or credit union, you might consider a subprime mortgage. Borrowers with bad credit, a bankruptcy or consumer proposal in their past. Anyone with uncertain income or the inability to provide traditional paystubs. Those seeking a mortgage on an unusual property might struggle to gain approval from more traditional lenders.

Who is eligible for a subprime mortgage?

Eligibility for a subprime mortgage is generally less strict than eligibility for a normal mortgage. Standard requirements include: Canadian residency, age of majority in your province, and a home to secure the mortgage against. As the value of the property is the most important factor with subprime mortgages, the home in question must be in a marketable urban area, to ensure resale value. Subprime mortgages tend to have minimal credit score requirements. Income level, proof of employment, size of down payment and existing debt levels are all also potential factors.

What are the typical terms of a subprime mortgage?

Subprime mortgages generally have higher interest rates than standard mortgages, to help offset the greater risk to the lender. Subprime mortgages also tend to have higher fees than other mortgages, ranging from 2% to 3% of the borrowed amount. The life of the loan is usually fairly short in comparison to standard mortgages.

How are interest rates on a subprime mortgage calculated?

Your credit score, size of your down payment, existing debt, income level and other financial factors all affect what terms you will be able to get on a subprime mortgage, including the interest rate you qualify for. The length of the loan also affects interest rate, as does the choice between a fixed or variable rate.

How do I apply for a subprime mortgage?

Applying for a subprime mortgage starts with gathering all of your financial documentation. You will need to show ID, proof of address, information pertaining to the property being mortgaged (valuation, purchase details, etc.). You'll be asked to provide financial statements indicating your assets and liabilities, previous tax returns to show income history, and paystubs or other proof of employment. Once you have gathered all of your information, you must complete an application form and submit to the lender for approval.

Are subprime lenders safe to use?

While there can be predatory lenders in the subprime market, seeking to exploit borrowers who have few other options with high interest rates and fees, there are also plenty of reputable subprime lenders who provide a valuable service to this segment of the population. Subprime mortgages are not however regulated by the federal government in the same way as standard mortgages, so it is up to the consumer to do their due diligence.

How common are subprime mortgages in Canada?

Although only 3% of Canadians fall into the “extreme risk” credit category of a score under 520, nearly 9% (3.5 million) of Canadians have subprime mortgages. This discrepancy highlights that it is not just bad credit that can lead borrowers to subprime lenders – many with good credit and non-traditional income revenues, or good credit and an unusual property use a subprime mortgage because of strict traditional mortgage requirements. This makes them a relatively common occurrence.

What are the risks of a subprime mortgage?

A subprime mortgage comes with risks, as does any form of debt. The greatest risk is affordability: as these loans have higher interest rates and fees than other mortgages. The risk to the borrower is greater in times of financial stress. Missing payments can lead to loan default and foreclosure. It is imperative to make sure you can afford any loan, but especially a mortgage, before agreeing to it.

Can I build my credit with a subprime mortgage?

Using a subprime mortgage to access a loan and then paying it off can actually help to repair your credit over the long term. Building a history of on-time payments and financial reliability will, over time, improve your credit score. By using a subprime mortgage to do this, you may actually help yourself qualify for a regular mortgage in the future. This pendulum swings both ways though: if you miss payments on your subprime loan, it will have a negative effect on your credit.