Who wants to be a mortgage broker??? I do, I do!
One of the hardest things I have to do in my job is to explain why someone does not qualify for a mortgage. Why do I have to use a particular equation or can’t use the income, or why will that down payment method not work. It’s challenging to clarify qualifying rules when common sense is thrown out the window. The rules do not always make sense, especially when someone is purchasing their first home or experiencing financial challenges and are trying to refinance to remove equity; these are highly emotional moments. Lucky for me, I have years of experience and have been down this road more than a few times myself and with my closest family members. Recently a client said the kindest thing to me, “I provide peace of mind.” I enjoy bringing understanding and smoothing the path, and today, I will give you mortgage keeners out there the outline of what it takes to qualify for a mortgage in 2021.
Let’s get started. And remember, as always, I’m here if you need me.
First, all mortgages are qualified on the Federal Stress test – this is not the rate you pay but the interest rate set by the government. The stress-test rate is currently 5.25% as of June 1/21.
Additionally, mortgages with 20% down or greater are qualified on the greater of the stress-test or the contract rate +2%. Should the contract rate for mortgages with 20% or greater down payment or equity be 3.99%, the qualifying rate will be 3.99% + 2% = 5.99%
GDS and TDS rule my world, well, all brokers and lenders
TDS and GDS – GDS is your Gross Debt Service = PITH Principe, Interest, Tax and Heat and 1/2 the condo fee if applicable. This number cannot exceed 39% of your gross income, with excellent credit. Your credit score will determine the percentage of your income used for qualifying.
TDS is your Total Debt Service = PITH+ Principe, Interest, Tax and Heat and 1/2 the condo fee if applicable and other debt such as car payments and credit cards. This number cannot exceed 44% of gross income with excellent credit.
Your credit score will determine the percentage of your income used for qualifying. If your credit score is lower, this will also lower the percentage of your usable gross income for qualifying. Take good care of your credit, and it will take care of you.
The five factors a lender will use to determine your interest rate.
- Credit – how you pay for living expenses and utilization of the credit you currently have
2. Down payment or equity percentage –
- 5%-19.9% equals the lowest rates as they are default insured by one of three insurers in Canada, CMHC, Canada Guarantee, or Sagan
- 20% to 34.9% a bit higher, as there is no default insurance – consider riskier – I beg to differ, but hey, I don’t make the rules
- 35% down payment = insurable rates – you don’t pay for the insurance premium; you receive the best rates.
- Rental property will have a premium on the interest rate – for obvious reasons, you are making money, and if you defaulted on a mortgage, it’s more likely to be on a rental than on a primary residence.
- Equity takeout/refinance mortgages will also have a slightly higher rate than a purchase with a default insurance fee
3. Are you self-employed with low tax declarations? Is your income considered nontraditional? We may need a stated income program; if so, you may pay a premium to your rate.
It’s a case of you didn’t pay taxes to show your total income due to deductions, and the lender is taking a more considerable risk, so…. you will pay a bit of premium on the default insurance and possibly the interest rate. I think it’s pretty minor.
4. GDS and TDS – the lower your GDS and TDS, the better your rate may be.
Lower GDS and TDS means you are not maxing yourself out financially; therefore, you are considered a strong covenant, you are highly desirable to a lender.
5. Timing, when are you closing or taking possession of your home? Best rates typically fall in the 30-day window.
Liabilities: I will be calculating the payment of credit cards and lines of credit as the account balance times 3%, regardless of the demand payment. For example: if your credit card balance is $4000.00, I must use $120.00 of $4000.00 x 3% – $120.00 –
This is a Federal Mortgage Lending Rule. In 2022, we will calculate the balance of credit card and line of credit at 5%. For example: if your credit card balance is $4000.00, I must use $200.00 of $4000.00 x 5% – $200.00 – regardless of what you actually have to pay the credit card company—another reason to keep your balances low. The payment calculation change will impact your ability to qualify for a mortgage if you carry balances on your cards and lines of credit.
Penalties: Not all mortgages are created equal. It’s essential to look for a reasonable rate and a good contract. Contract penalties can widely vary from one lender to the next; the devil is in the details.
Now you can consider yourself a junior mortgage agent – wink.
The rules for mortgage lending are constantly changing, keeping me on my toes. If all of this was as clear as mud, great – this means I will continue to be employed. If you have questions, please, give me a call; I’m here to help.