23 Jul

New Qualifying Rate for the Mortgage Stress Test

General

Posted by: Michael Greene

For the first time in three years, the Bank of Canada, on Friday lowered the qualifying rate from 5.34 percent to 5.19 percent.

A typical mortgage application is tested against this five-year benchmark rate or the qualifying rate plus two percent, depending on which one is greater. This slight decrease could make a big difference for many Canadians applying for a mortgage.

So, what does this mean you may ask, well let’s see!

Let’s take an example; Sally makes $60,000 a year and she is putting 20% down payment. Stress tested at 5.34%, Sally would qualify for a mortgage of about $278,651 versus stress tested at 5.19%, she would qualify for a mortgage of about $282,716. As you can see, Sally would now be able to qualify for an extra $4,000 of mortgage approximately.

This certainly won’t have a huge impact on mortgage approvals but it will give some much-needed relief. This could be looked at as an added bonus for first-time home buyers, and combined with the down payment assistance – this is great news.

In February 2018, home sales dipped to their lowest levels since 2012, this was due to the introduction of the stress test that was introduced in 2017.

Although the new five-year benchmark rate is certainly good news from some prospective buyers, it hasn’t really changed the system that much, Samantha Brookes, CEO of broker Mortgages of Canada, told CBC.

“Consumers are in this wait-and-see pattern — it’s still difficult to get into the market because that stress test is there.”

It’s also something that’s sparked much debate among groups like the Ontario Real Estate Association, the Toronto Real Estate Board (TREB), the International Monetary Fund, Canada Mortgage and Housing Corporation (CMHC), and even some economists.

On one side of the aisle are those like TREB who say that the rules need to be relaxed because so many are still locked out of the housing market as a result of the test’s strict qualification metrics. And on the other are those like the CMHC who say that doing so would be a “reckless myopia.”

The qualifying rate is used in the stress tests for both insured and uninsured mortgages, so this lower rate will make it easier for borrowers to qualify for a mortgage. These tests were set up to ensure the potential homebuyer can afford the mortgage payments.

22 Jul

How to Get a Mortgage as A Self-Employed Canadian

Mortgage Tips

Posted by: Michael Greene

You may not fit in the neat boxes at the bank. At Mortgage With Mike we don’t have boxes, we have solutions!

Self-employment is becoming more and more popular amongst Canadians, who account for 15% of the population according to Statistics Canada. We have an entrepreneurial spirit and are very hard working. The problem is that it is also becoming more and more difficult for self-employed people to get a mortgage, even with good credit. Typically, the banks will only give you a loan up to 65% LTV maximum as a 1st mortgage.

In Ontario, if you have less than a 20% down payment, you need to prove two years of income. Unfortunately, many self-employed people claim a smaller income for tax purposes. If this is you, the big banks will see you as a risk.

We work with self-employed Canadians every day and come to understand the issues they face when seeking financing. Your dream of homeownership should not be crushed by a decline from the bank.

Self-Employed Mortgage Options 

Now when it comes to being self-employed there are two ways to get approved for a mortgage with income validation, and without income validation.

Validated income means you’ve been in business for two full years, the business is registered as a self-employed proprietorship, you have good credit, and you’ve declared income on your tax returns. That doesn’t mean you’ll necessarily qualify for a mortgage with a lender; it just means you have proof of income.

Without income, validation means you can show that you are self-employed and you can’t prove your income but you show enough information for the lender to determine you are making sufficient money.

With proof of income, you would be able to get a mortgage from any one of the three mortgage insurers CMHC, Genworth, and Canada Guaranty. If you cannot validate your income you will have to find a lender that accepts Genworth and Canada Guaranty.

A. Self-Employed with Bad Credit

Having bad credit can make it very difficult to secure a loan from a traditional lender. In addition to being self-employed, which the banks view as risky, bad credit suggests there is an even greater chance you’ll default on a mortgage.

A private lender, on the other hand, is much more concerned with your current and future earnings than past mistakes. Your credit score may be bruised, but private lenders will still help you secure a mortgage if your business is profitable and you have a steady income.

B. Self-Employed with Low Income

If you’re self-employed and report low income, you can still qualify for a mortgage. There are a large number of private lenders that will help you secure a low-income or even no-income mortgage.
Again, private lenders understand that most self-employed Canadians try to minimize their taxable income. Private lenders know the difference between reported income and gross income. In fact, some private lenders will add 10% or 15% onto the reported income if you can show business deductions that are equal to or greater than that. This can significantly increase your mortgage eligibility.

C. Self-Employed and Over 55

One of the largest growing demographics among the self-employed in Ontario are those 55 years of age and older. You might be an entrepreneur but when you hit 55, banks only see that your long-term earnings potential is smaller than it was when you were 45 or 50. At the same time, chances are you’re looking for the same kind of mortgage as someone who is 25 and just getting on the property ladder.
According to the big banks, this means you’re less likely to be able to pay the mortgage off. Fortunately, there are private lenders that specialize in helping those who are 55 and older secure a mortgage.

Self-employed Mortgage qualifications

  1. Credit rating has to be average to excellent.

  2. Down payments can range from 35% for Non-CMHC and 10% down with CMHC
  3. Proof that you are a principal owner in the business. (GST Return, articles of Incorporation, a recent Invoice, a business license, Business brochure)
  4. At least 2 years as a self-employed person.
  5. Stated Income is allowed – Income Verification Not Required.
  6. In some cases need most recent Notice of Assessment to show NO income taxes are owed.
  7. Financial statements for your business.
  8. Proof that your HST and/or GST is paid in full.
  9. Contracts showing expected revenue for the coming years.
  10. Your personal and business credit scores.
  11. Proof that your down payment has not been gifted.

Final Thought: Everyone already knows it makes sense to go to a specialist to get the job done to satisfaction – similar to how you consult other expert advisors, such as lawyers, accountants or financial planners. We are your mortgage professional and will work with you directly. You may have a complex situation – it makes perfect sense to find an experienced mortgage professional who can customize a mortgage product to meet your specific needs while keeping you short-term and long-term financial goals in mind.

Some food for thought

  1. If pays to plan ahead. Speak with a trusted mortgage professional well before seeking to secure a mortgage. What does your debt load look like? What are your plans for business growth? How much income do you plan to declare?
  2. Keep your credit in good standing. This is the most important in obtaining a mortgage as a self-employed individual, you must maintain a sound credit history.
  3. Be Organized. Keep all your financial statements, tax returns, T1 Generals, Notice of Assessments, etc. in good order. It may pay to hire an accountant to help keep you organized.

Securing a great mortgage as a self-employed person should not be a hard task. Consider speaking to your trusted mortgage professional to assess your situation.

15 Jul

Mortgage Debt Ratios: Basics of GDS & TDS

Mortgage Tips

Posted by: Michael Greene

How are GDS and TDS calculated?

You may use a mortgage calculator to determine your qualification when applying for a mortgage, it will give you have an idea of where your GDS/TDS mortgage debt ratios line up. But when applying for a mortgage first step, lenders will use the “Five C” rule when analyzing someone’s ability to afford that mortgage:

1) Capacity to repay (your income)
2) Current economic conditions (your profession’s current economic status as well as your city and country’s economic situation)
3) Capital put down (the down payment you provide, which is the amount of equity you’re offering to secure the asset)
4) Collateral (what the home is worth)
5) Character (your history of paying off debts, otherwise known as your credit history)

The second step is to qualify for a mortgage, so lenders will examine two ratios:

# 1. The GDS: Gross Debt Service is the percentage of the borrower’s income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees).

# 2. The TDS: Total Debt Service is the percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.

Keep in mind, however, that these ratios are used by lenders to assess your debt load potential—it should not be used as a way to determine if your debt load is manageable. That’s because these debt ratios do not take into consideration everyday expenses. So, even if you are comfortably under the 32% GDS threshold or the 40% TDS threshold when it comes to mortgage, property taxes and heating costs, you may still struggle to cover your various monthly expenses.

For both GDS and TDS calculations, you could add up your monthly housing expenses/all of your monthly debts and multiply by 12 to get the total amount for the year, and then divide that number by your annual salary. Multiply that figure by 100 to get your GDS/TDS ratio.

Let’s look at some scenarios:

Tom and Anna want to buy a house. Their combined annual salary is 88,000, which makes their gross monthly income of $7,333. They estimate that their mortgage payment and property taxes will be $2,250, heat will be $75, and they’re making $250 in credit card payments a month, with $375 in car loans.

GDS: $2,325 / $7,333 = .31 x 100 = 31 per cent

TDS:  $2,950 / $7,333 = .40 x 100 = 40 per cent

Sam wants to buy a condominium. With an annual salary of $65,000, his gross monthly income is $5,417. He estimates that the mortgage payment on his home will be $1,650, his monthly bill for his property taxes will be $125, heat is $35, and condo fees are $500. He also has a student loan payment of $550.

GDS: $2,060 / $5,417 = .38 x 100 = 38 per cent

TDS: $2,610 / $5,417 = .48 x 100 = 48 per cent

As you can see, Tom and Anna are within the GDS/ TDS standards. Both of Sam’s ratios are too high according to industry standards.

Your GDS and TDS figures don’t tell the whole story – they don’t take other basic expenses into account like transportation or food. So you want the ratios to be as low as possible to leave room for all of your other incidentals. Using a Mortgage Qualifier Calculator to figure out how much mortgage you can actually afford will help you keep an eye on the bigger picture.

If you need assistance, reach out to your local Dominion Lending Centres professional for a free consultation.