Alternative Mortgages Explained

Spectrum’s area of expertise is alternative mortgage solutions for clients who fall outside bank and credit union lending guidelines. The reasons for this may include the difficulty in assessing self-employment income; the desire for higher loan-to-value or debt service ratios; or because of past credit problems. But it may also be due to specific ‘A’ market niches which the bank or credit union may be averse to lending in (e.g. multiple rentals, borrowed downpayments, discharged bankruptcies and net worth programs).

The most common misconception is that an alternative mortgage solution is a ‘sub-prime’ mortgage for a borrower who may be credit impaired, but many alternative mortgage solutions are provided for A clients with perfect credit who simply don’t fit the increasingly strict lending guidelines of banks and credit unions.

The most common question is “Does this mean high rates?”
As the graphic below illustrates, rates vary widely in the alternate space where each mortgage is priced individually for risk. There are many lenders servicing different segments of the alternate mortgage market offering a wide range of products and options within each segment.

For clients who fall just outside of conventional lending guidelines, the Alternate A (or monoline) Lenders provide mortgage financing with rates the same or similar to bank/credit union rates.
As we move down the credit risk ranking, lenders offer different products priced individually for the risk of each mortgage.

Mortgage Industry Overview Graphic

What does this mean?
All lenders underwrite mortgages using the 5 C’s of credit and these are explained briefly here:

The five C’s of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. It weighs five characteristics of the borrower and conditions of the mortgage, attempting to estimate the chance of default. The five C’s of credit are character, capacity, capital, collateral and conditions.

Character – Sometimes called credit history, refers to a borrower’s reputation or track record for repaying debts.

Capacity – measures a borrower’s ability to repay a mortgage by comparing income against recurring debts and assessing the borrower’s debt service ratio.

Capital – lenders also consider any capital the borrower puts toward a potential purchase or how much equity is in the property. A large contribution by the borrower or substantial equity stake decreases the chance of default and/or risk of recovery by the lender.

Collateral – For mortgage loans collateral is the property itself that a borrower offers as a way for a lender to secure the loan.

Conditions – Refer to how a borrower intends to use the money. For example, if a borrower applies for a home improvement loan, a lender may be more likely to approve that loan because of its specific purpose.

Spectrum’s Role and Process
Through its 3 divisions, Spectrum’s strong history in originating, underwriting and managing alternative mortgage solutions has given it the specific knowledge necessary to successfully navigate this marketplace as the company continues to develop new origination, funding and servicing programs to build upon its proven expertise.