With today’s high interest rates and difficult approval standards, you may be hearing more discussion on A and B lenders. Is one better than the other? Well, it depends on your specific situation. Before we get into it, it’s best to first understand that there are three main classes of lenders: A lender mortgage, B lender mortgage, and private lender mortgage:
A lender - Any mortgage funded through traditional sources; banks and A-tier broker channel banks.
B lender - Any mortgage funded through non-traditional banks; this could be trust companies, credit unions etc.
Private lender - Any mortgage funded outside of lending institutions; private equity, Mortgage Investment Corp., individual lenders etc.
While it is true that A lenders offer the best mortgage rates, longer term options, and slightly lower affordability, they also have much stricter approval processes. Banks will often use something called the stress test to approve individuals. The stress test uses an interest rate 2% higher than the going rate to determine what a person’s salary can afford. As you can imagine, when interest rates are high this makes it incredibly difficult to be approved. Especially since the stress test is just one of many metrics traditional banks will use. B lenders on the other hand offer clear solutions for those who don’t fit into the A lender category. This could include reasons like non-traditional employment (self-employed, non-salaried), affordability, lower salary, lower credit score, past bankruptcy, and non-traditional down payment sources etc. Receiving approval can be much easier and thus get you into a home quicker. As the name implies, a B lender does assume a greater level of risk resulting in higher interest and mortgage closing costs, as well as requiring 20% down. But don’t feel stuck! Typically B lenders offer one to three year terms rather than the traditional five years offered by A lenders. This means if circumstances improve there is future flexibility for the individual to qualify with an A lender. Whether A or B lenders are better all depends on your unique situation and goals. A lenders offer more affordability, while B lenders are a great solution for individuals with non-traditional circumstances.
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