1 Oct 2015
The Ideal Mortgage Qualifying Client
There are a million variables that determine how one can qualify for a mortgage. The banks, mortgage lenders and credit unions all have different guidelines to be able to qualify under their programs, and then we have the mortgage insurers and multiple other regulatory bodies that affect decisions as well. Variables such as: income type (Employee, Self Employed, pension, etc.), affordability ratios, down payment/gift/equity, credit quality, property type and the list goes on.
The rules for each one of these criteria can differ from one credit score, income type, etc. to the next and unraveling them all is like peeling an onion – there are a lot of layers.
Income – From the lenders’ perspective, the most stable income type for a consumer (based on historical data) is the ‘Employee’. The ‘Employer’ essentially holds the risk of their employees’ personal income taxes, so the employee is the favoured choice. Ideally, they prefer to see the client with the same employer for 2 years, changing positions isn’t usually a bad thing within that employer, depending on how that new income is generated. For example, salaried positions are least risky as they are the most stable. Getting into salaried plus over time (OT)/bonus/commissions is an entirely new set of criteria. IF we need to use either of those ‘bonus’ types of income, the rules now state that you have to qualify on your most recent two years of income and preferably at the same employer. In either case, the banks are looking for the least amount of risk when providing any sort of loan. So, it’s easy to presume longevity and consistency rule. Remember, that’s the perfect scenario, there are always exceptions based on the quality of the other variables.
Down Payment – The strongest types of down payment/equity are those where they are earned yourself-it shows character. To prove the ‘earned’ down payment/equity, we need to show them verification of the funds over a 90 day period whether it’s coming from your saved up bank accounts, RRSP’s, GIC’s or investment statements. They are looking for the anomalies in the deposit amounts and any large irregular looking deposits need to be accounted for and usually explained. Equity is confirmed via mortgage statements and the sale contract or appraised value. There are other types of down payment as well, for example, gifts from immediate family members, sale of existing assets or borrowed from your existing home or line of credit(unsecured borrowings have tighter qualifying guidelines).
Credit – Credit scores range between 300-900, the higher the better. In Canada, to qualify for the best products and rates that the banks and lenders offer, they want to see your credit score above 680, and preferably over 720 plus. The score isn’t the end all be all either these days, they want to see longevity and differing types of credit. The rule of thumb is two years of credit, over two thousand dollars on two different loans and both loans open today (whether it be two credit cards at $2000 with zero to low balances or car loan and a credit card or other variations as well)-again longevity and consistency here rules.
Affordability Ratios – In the mortgage world this is called your Debt Service Ratios. Total Debt Service Ratio (TDSR) and Gross Debt Service (GDSR) are the ones used on the residential side of mortgage applications. The lenders are using your qualifying income vs all of your monthly obligations to come up with the ratios. Just like your golf score, the lower the ratios, the better your chances of qualifying for a mortgage. The better credit quality clients can have TDSR ratios as high as 44% and 39% for GDSR, but usually 40% is used as a historical rule of thumb.
Property Type – We all know there are a lot of variables here, especially in Alberta. Anything outside of a regular home zoned as a ‘single family residence’, will likely be scrutinized further and may come with additional qualifying factors.
These are just some of the basics that the lenders look at to aid in qualifying you for a mortgage. To put it simply, the least risky client is a two year tenured salaried employee, has saved up their own down payment or has equity in their own home, has low TDS/GDS ratios, is buying a single family ‘re-marketable’ home in a densely populated area, their credit score is over 750 and has well over two years of credit on more than two loans. In a perfect world, the banks want everyone to look like this, but we all know that isn’t so.