When it comes to qualifying for a mortgage, there is a big difference from a couple of years ago and now. The recent mortgage rule changes coupled with a curve in the housing market has affected all areas of the mortgage application and I want to highlight a few key differences that are impacting approvals the most. However, before I do that, I want to insert a caveat; the below comments on qualifying are for general information only and do not apply to all borrowers. I encourage you to have a conversation about the fine print of any mortgage commitment before you remove any financing conditions on a new purchase, For now, have a read below to see if you could be affected by any of the current qualifying guidelines.
If you already own multiple rental properties, refinancing or purchasing a rental property may come with a few more hoops than you had to jump through previously. Your lender options are reduced even further if you have more than 4 properties in your rental portfolio and the various lenders all seem to have different rules if you are holding those properties under your name versus in a corporation or holding company. There are definitely still options available to you, so don’t let that scare you off, however, important to be prepared to provide supporting documents related to all of your properties such as lease agreements, mortgage statements and proof property taxes are up to date up front.
If rental income is required to help you qualify for the new mortgage, it is very important you are working with a lender whose rental income guidelines are going to work for you versus getting declined because you don’t fit into that lenders “box”. There are a number of different ways the various lenders are calculating the rental income to be used in qualifying and without going into too many details, here are 3 different simple calculations:
1) The lender will only include 50% of the rent and add it to the employment income for total income used to qualify for the new borrowings. They will then include full carrying costs of the property with any other debts you have. Costs would include mortgage payment, property taxes, heat and condo fees if applicable. This is the most difficult guideline to qualify under
2) The lender will look at using a “rental offset” which could be as high as 80% of the rental income. Let’s say rental income per month is $2,000. Lender will use 80% which is $1600. If carrying costs of that property as mentioned in the above example total $1,450, only the difference of $150 will be included with your other monthly debt payments. This calculation would be the easiest to qualify under.
3) This third example is called the debt coverage ratio ( DCR) and it is simple to qualify under if the rental income “more than” covers the carrying costs of the property. Average minimum DCR the lenders like to see is 1.1 times. Your mortgage professional will likely use a lender specific debt coverage worksheet in order to calculate the ratio for your property and what is included on those worksheets will also vary with the different lenders.
Gifted Downpayment Funds
Some lenders are now requesting verification of the “source” of the gifted funds. For example, if your parents are gifting you $10,000, not only do you need to provide a signed gift letter and proof of deposit into your account, the lender could also request a statement from your parents bank account confirming they do in fact have the funds on deposit. And further to that, some lenders may even ask for a 60 or 90 day history of those funds to confirm they weren’t just “dropped” in there yesterday.
Stated Income Applications
These types of mortgage products are geared towards self-employed borrowers who cannot confirm income sufficient to qualify for the mortgage. In other words, you choose to take a small salary out of your business as personal income. If you require this type of financing, not only are you required to put down a minimum of 10% versus the usual 5%, you will still be asked to provide some sort of documentation which state your gross business income. The exact requirements will vary with the different lenders as will the rates depending on your individual financial circumstances. It’s a good idea to work with a mortgage professional with experience with these types of mortgage applications to increase your chances of a mortgage approval.
Minimum Payment on Outstanding Debts
This one is especially important as it ultimately affects the maximum mortgage amount you can qualify for. For that very reason, it is imperative you are working with a lender who will qualify you based on your debt load at the time you are making the mortgage application. Very common recently for an individual to be declined by one lender only to be instantly approved by a different one! In the past all lenders would use the minimum payment on any debts you had in qualifying you for any new borrowings. For example, if your minimum payment was 2% of the outstanding credit card balance or interest only on your home equity line of credit, that was the payment used in your qualifying ratios. These days, many lenders require 3% of the balance owing as the minimum payment even if it’s lower than that and there are many different calculations being used for minimum payments on secured lines of credit. The reasoning behind it is the lender wants to ensure you can afford to lower your debt levels as well as support the new mortgage and property costs.
If you’re in the market for a new mortgage, welcome to the very different world of mortgage lending! The good news is that historically low interest rates are comforting weary borrowers. Coupled with that is lenders are still accepting alternatives. By working with an experienced mortgage professional who has access to multiple lenders, you can increase your odds of finding the perfect mortgage approval solution.