Can’t Qualify for a Mortgage? Alternative Home Financing Strategies for Canadians
If you’ve been declined for a mortgage by a bank, don’t have enough down payment, are self-employed, or have credit challenges, you still may have options for entering the housing market. Alternative mortgage financing strategies can help some Canadians purchase a home when traditional lenders say no.
Home ownership remains a worthy goal for most Canadians. Today, with rising home prices, higher mortgage rates and mortgage stress test requirements, Canadian home buyers often struggle to meet the traditional mortgage borrowing requirements. For many, it may be worth exploring various alternative strategies to finance a home purchase.
The Canadian housing market remains active despite producing lower numbers than a couple of years ago. Declining house prices have improved affordability for new buyers, but Canada’s largest markets remain expensive relative to average incomes. According to CMHC, around 60% of renter households aspire to home ownership as a long-term goal, while an Ipsos study for Century 21 Canada found that 70% of current renters dream of owning a home someday.
If your mortgage application was declined, what can you do to enter the housing market? Are there mortgage alternatives in Canada that can work for you in today’s market? Let’s review the strategies we see some Canadians using today.
What is Required to Qualify for a Mortgage Today?
Before diving into alternative mortgage strategies, let’s look at the primary method of financing a home purchase: securing a mortgage. The key factors that lenders consider when evaluating you as a borrower include:
- Credit Score: Borrowers often overlook a good credit score, but it is crucial. Prime lenders typically look for scores above 680. Borrowers with lower credit scores can often secure a mortgage but at higher rates.
- Down Payment: The minimum down payment for an insured mortgage is 5% for homes worth up to $500,000, and 10% for the portion of the home price between $500,000 and $1.5 million. If your down payment is greater than 20% you do not require mortgage insurance. Homes worth over $1.5 million are not eligible for mortgage insurance and require a minimum down payment of 20%.
- Income and Employment: Stable and provable income is necessary to qualify for the lowest mortgage rates. Lenders will use your income to calculate your debt-service ratios to ensure you can manage the required mortgage payments over time.
- Mortgage Stress Test: Mortgage borrowers must pass the mortgage stress test. This stress test is part of the debt-service calculation. The mortgage rate used by lenders today under the stress test is your contract mortgage rate plus 2%.
One area of traditional lending that has also seen some change in recent years is family members providing assistance. New home buyers often receive either i) down payment funds from parents, or ii) a close relative acting as a co-signer. Either of these strategies can greatly enhance a new homebuyer’s chances of qualifying for a mortgage.
What are the Common, Traditional Mortgage Products?
- Fixed-Rate Mortgages: These are the most common mortgages in Canada. They offer a stable interest rate during the term of the mortgage and predictable monthly payments for the term of the mortgage. They are the conservative choice for most mortgage borrowers.
- Variable-Rate Mortgages: These are less common than fixed rate mortgages but become more popular when i) borrowers believe that interest rates will decline in the future, or ii) variable rates are materially lower than fixed rates. Variable mortgage rates fluctuate with the market, which can lead to lower rates during the term of the mortgage. The trade-off is that they create interest rate risk for a borrower than can be costly if rates move higher.
- High-Ratio, Insured Mortgages: Mortgage insurance helps borrowers that have smaller down payments. If your down payment is less than 20% and the property value is less than $1.5 million, then you require mortgage insurance through CMHC, Sagen, or Canada Guaranty. When your mortgage is more than 80% of the property value (i.e. your down payment is less than 20%) it is considered a ‘high-ratio’ mortgage. Insured mortgages can have either fixed or variable rates.
These traditional mortgage financing methods have worked well over time in Canada. The housing and mortgage markets in Canada are generally strong and have historically compared favourably to other jurisdictions. From 2016 to 2022, Canadian house prices increased dramatically. We are now in a market correction and prices have declined. In some markets prices are now back to pre-pandemic price levels. The current interest rate environment is considered normal from a historical perspective, but it creates a challenge for many borrowers to qualify as house prices remain high in many markets, despite the recent correction in prices.
A recent CMHC survey, shows that 81% of Canadian homeowners “believe that homeownership is a good long-term financial investment”. This shows the continuing belief in homeownership among Canadians despite recent market challenges.
Adapting to the higher interest rate environment presents challenges but homebuyers continue to adjust. Many have turned to non-traditional or alternative home financing methods. The availability of these alternatives demonstrates the market’s adaptability and Canadian’s persistence in pursuing the homeownership dream.
Can you Buy a home if you can’t qualify for a mortgage with your bank?
The answer is often yes. With the housing market becoming more challenging, many Canadians are turning to alternative mortgage financing strategies to make home ownership possible.
What is Alternative Mortgage Financing?
Alternative mortgage financing refers to home-buying strategies used when borrowers cannot qualify for a traditional mortgage. Common options include private lending, rent-to-own agreements, shared equity arrangements, and co-ownership.
What are the Main Alternative Mortgage Financing Strategies in Canada?
The main alternative mortgage financing strategies in Canada are:
- Private lenders
- Rent-to-own
- Shared Equity, and
- Co-ownership.
These strategies represent alternatives that may allow you to but a house when you do not qualify for a traditional mortgage.
Private Lenders
When traditional A- or B-lenders aren’t an option, private lenders can work for some borrowers. You should always try to qualify for an A-mortgage or a B-mortgage first. A private mortgage should be a last resort for borrowing on your own. The reason for this is that private mortgages are more expensive, often far more expensive than the other alternatives. Private lenders often provide more flexible terms but that comes at a cost.
| Pros | Cons | |
|---|---|---|
| Flexible Underwriting Criteria | Higher mortgage rates and fees | |
| Faster approvals process | Shorter terms and balloon maturity risk | |
| Ability to finance non-traditional properties | Private lenders may not offer a renewal | |
Rent-to-Own
This option allows potential buyers to rent a home with the intention of purchasing it after a certain period. A portion of the rent goes towards the future down payment. It is beneficial for those who need time to save for a down payment or improve their credit score.
| Pros | Cons | |
|---|---|---|
| Time to save for a down payment | Higher rent payments | |
| Portion of rent contributes to future ownership | Non-refundable fees | |
| Opportunity to build credit | Potential for losing investment if unable to purchase at end of term |
Shared Equity
Shared equity involves partnering with a company that provides part of the down payment in exchange for a share of the property’s future appreciation. You could give up significant future appreciation in the home you purchase, but it may be worth it if you cannot qualify without it.
| Pros | Cons | |
|---|---|---|
| Reduces the initial down payment you are required to fund yourself | Sharing upside house value appreciation | |
| A larger down payment using these funds leads to lower monthly mortgage payments | A third party is now involved in your home ownership | |
| Can enter the housing market sooner | Deal complexity |
Co-Ownership
Co-ownership involves purchasing a home with friends, family, or other parties. Multiple parties can share the ownership and split the costs. Sharing the down payment and mortgage payments can make for a more affordable entry into the housing market.
| Pros | Cons | |
|---|---|---|
| Share the financial burden and obligations of home ownership | Potential for conflict among co-owners | |
| Can potentially afford a larger or better-located property | Legal complexity | |
| Co-owners can support each other | Potential for difficulty when a co-owner wishes to sell |
Conclusion
Financing a home purchase in Canada today can be challenging. If you are unable to qualify for a traditional mortgage, it is worth investigating alternative methods to achieve homeownership. Alternative mortgage strategies like rent-to-own, shared equity, co-ownership, and private lenders may offer you a viable path to homeownership. Each option comes with its own set of benefits and drawbacks, so it is essential to assess your financial situation, long-term goals, and risk tolerance.
Not every borrower fits neatly into a bank’s lending guidelines. If you’ve been declined by a lender, are self-employed, have credit challenges, or simply need a creative financing solution, our team can help explore your options.
Contact Frank Mortgage today for a no-obligation consultation. We’ll review your situation, explain potential alternatives, and help you determine the most appropriate path toward homeownership. Click below to arrange to speak with an advisor or call us at 1-888-850-1337.
