Sunday, October 29, 2017

Tips for mortgage qualifying under the new "B-20" rules

The chart above is from the Bank of Canada's daily digest page, which shows the interest rate that is used for qualifying for most mortgage loans through Canadian banks.  What it means is that you need enough income to pay a 4.99% mortgage, even if the bank is offering you an interest rate of 2.99.  The exception to this is for people with at least 20% down taking out a mortgage with a fixed term of at least five years.  The new B-20 rules remove this exception, and will require every mortgage loan from a Canadian federally-regulated bank to test the borrower's ability to pay an interest rate that is the greater of the contract rate plus 2% or the posted qualifying rate.

The first tip is one that has already been mentioned in some financial papers, and that is to go with a 30-year amortization instead of 25.  That change will decrease your monthly mortgage payment by about 8%.  A 35-year amortization would reduce the monthly mortgage payment even more, but it's hard to find banks that still offer 35-year amortizations.

The next suggestion I have for improving your chances to qualify for a larger mortgage will help even if the B-20 rules don't apply to you, and that's ensuring the bank is using the correct numbers to calculate your debt service ratios.  I mentioned debt service ratios (DSR) in an earlier post, and listed a few things that lenders use in their formulas.  Since the formulas tend to be complicated, lenders usually will not sit down and review the numbers they are using with borrowers.  They'll pull many of the numbers from the borrower's credit bureau file, and for other numbers they'll use standard assumptions.

For responsible borrowers that pay their bills in full every month, the most significant and incorrect assumption lenders make is that you don't pay all your credit card bills.  They assume you'll make payments of 3% per month, and they'll add that 3% to your monthly debt service costs.  That means if your last credit card statement was $5000, the lender will add $150 to your monthly debt service costs.  If your last two or three statements show the balance always paid in full, that should be enough to satisfy your lender.

Another common item that adds to debt service costs are vehicle loans.  If you have a car loan that is almost paid off, paying it off early could allow you to qualify for an additional $10,000 or more on your mortgage.  If you've co-signed on a vehicle loan for a family member, the lender will use the full loan payment amount in your DSR calculations, even if the vehicle owner always makes the payments.  If the family member can re-qualify without a co-signer (or get someone else to co-sign), then you can qualify for a larger mortgage.

If you are receiving spousal or child support, ask your lender if they include that in your income.  You'll likely need to provide them with a copy of a court order to prove not only the amount you are receiving, but also to prove that the payments are enforceable in the event your former partner stops.

The last suggestion is a general one to verify the numbers that your lender is using.  In fact, even before applying for a mortgage, I recommend checking your credit report for errors and getting them fixed.  When you do apply, verify all the assumptions the lender is making are correct.  Some lenders assume average monthly heating costs of $100-$150.  That might be reasonable for an older house in PEI heated with electric baseboard, but not for a newer energy-efficient home in Alberta where natural gas prices are close to the lowest in North America.

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