What’s The Difference Between Private Lenders And Alternative Lenders?
If you’re a homeowner in need of capital, chances are you’ve stumbled across a variety of lending options. Two common lending solutions that often puzzle homeowners are Private Lending and Alternative Lending.
Both private and alternative lenders differ from traditional lenders, such as the Big 5 Banks in Canada. Traditional lenders often have strict lending requirements, as well as long application and approval processes, making both private and alternative lending solutions more favourable for homeowners in need of immediate capital. Similarly, however, both private and alternative lenders
Whatever your financial needs may be, one lending solution may always be favoured over another. To help better distinguish the two options, we’ll break down the difference between private lenders and alternative lenders, as well well which option is best for you!
Lending requirements among alternative lenders are similar to private lenders. Alternative lenders typically still have tight guidelines regarding the mortgage repayment process, similar to traditional banks. Among these repayment guidelines include 2 mortgage formulas that alternative lenders may use to determine exactly how much money they’re willing to lend you:
- Total Debt Services (TDS): the percentage of your income needed to cover all of your debts, including property taxes, mortgage payments, monthly heating, and all other debts (ex. Car loans, credit card debt, etc.),
- Gross Debt Service (GDS): the percentage of your income needed to pay your monthly housing costs, including your property taxes, mortgage payments, and monthly heating.
Despite this, alternative lenders remain more flexible when compared to the stern restrictions imposed by traditional banks for lending and financing requirements.
Similar to private lenders, alternative lenders assess your home value when determining the amount of capital you are eligible for. Conversely, unlike private lenders, alternative lenders are more sensitive to the amount of your home equity and are less (rarely) likely to consider providing a mortgage over 80% loan-to-value of your home. This means if your home were valued at $500,000, a mortgage issued from an alternative lender would likely not exceed $400,000.
Private lenders differ from alternative lenders in the way that they focus primarily on the home equity in your house. Private lenders have a much higher risk tolerance and do not factor in a client’s income or credit score as a loan eligibility requirement. The max loan-to-value percentage often sits higher than that of a mortgage from an alternative lender, though typically only goes up to 80% as well.
The goal of a private lender is to provide you with the funds you require when you need them. Similar to alternative lenders, private lenders are interested in understanding your story when providing you with a loan. This includes:
- Why you are in need of capital
- How do you intend to spend your capital
- Your exit strategy and repayment plan, and more.
However, unlike traditional banks, private lenders like our teams at Leap Financial do not base your loan eligibility based off of these questions. Instead, our team of experienced financial professionals uses these questions to devise a strategy to help you best achieve your true financials and freedom, all while providing you with the money you need, quickly.
The flexibility for financing requirements makes mortgages from alternative lenders a great option for those who do not meet all the strict criteria demanded by the Big 5 Canadian banks. However, homeowners often favour private lenders, such as Leap Financial, for home equity loans — provided their lending requirements (focused on your home equity), quick approval process, and expert guidance.
Unlike traditional banks, a home equity loan from a private lender has no spending requirements. This means you’re free to spend your capital in whichever way pleases you! Homeowners commonly use their home equity loans to:
- Finance a new business endeavour
- Consolidate outstanding debt
- Place a down payment on a second property
- Pay off student debt or tuition, and more!
For more information on how you can take advantage of the home equity in your house, be sure to check out our other articles! But if you’re ready to discover how much you would qualify for with a home equity loan, take the leap and fill out our cost-free zero-obligation form, today!