The Building Blocks of your Mortgage
The building blocks of your mortgage are made up as a function of three major components: your down payment or equity in the case of a refinance, credit, and income.
Your down payment is divided into two categories, the amount of down payment and the source:
Within Canada the minimum down payment for new home purchases is 5% of your purchase price. The minimum equity required is 20% for a refinance.
These amounts and limits have been set by the government and are imposed upon all major banks and trust companies. The exception to this rule is in the case of private lending where these restrictions do not necessarily apply.
For almost all purchases in Canada that have less than 20% down payment, your mortgage is insured against default for the lenders by either CMHC, Genworth, or Canada Guaranty.
More on this in the “mortgage default insurance” section.
The government asks lenders to verify the source of the funds of down payment for all purchasers as a part of the anti money laundering act. Down payment can be deemed to be from either your “own funds” ie: cash, sale of investments, borrowed against a hard asset, or family gift, or they can be “borrowed” ie: an unsecured line of credit. For “borrowed” funds the lending field is narrower, underwriting can be more restrictive, and rates might be a bit higher.
Your credit is calculated into a number called a beacon score, this is a number out of 900 and takes into account several factors including:
*The amount of credit you owe versus your limits
*Your past repayment history including any missed or late payments
*The length of time you have had credit
*The number of credit items you have
*The types of credit you have, for example instalment loans (vehicle loans, student loans, investment loans) and revolving credit (credit cards and lines of credit)
*The number of recent credit enquiries
Most mortgage lenders look for a minimum credit score in the low to mid 600’s in additional to typically wanting clients to have two credit items with two years of repayment history. If clients are shorter on credit, depending upon the lender, there are sometimes some more flexible solutions we can work through.
These flexible options include an exception where we use 12 months of bank statements for you. Within these bank statements we will look for 12 regular monthly rental payments along with one other regular payment such as your utilities, phone bills, or vehicle insurance. If we are able to show this history we are often able to obtain an exception to the traditional credit requirements.
Bankruptcy and consumer proposal:
If you have experienced either of these, the general lender guidelines for mortgage approval is they will ask for you to be discharged for two years and have one year of reestablished credit with two significant credit items such as a vehicle loan and a credit card with a limit of $2000 or more. If you do not have the asked for amount of time discharged or the reestablished credit we can still consider approving you for your mortgage if you have a down payment of 35% of your purchase price or if you have a strong co-signer.
Income requirements and qualification ratios:
For employed clients, lenders will often ask us for an employment letter and a recent pay stub to confirm your employment, some lenders will ask for personal tax returns in lieu of an employment letter.
If we are using overtime or variable income, lenders will often ask for a two year history and then average the two years to determine the amount of income they can use for you. If you have been receiving the overtime or variable income for less than two years but more than one year we are often able to obtain an exception by using your last years personal tax return income and then averaging it with your annualized current year to date pay stub. The closer we are to a two year history the greater our chances of obtaining your approval are.
For self employed income, lenders will require you to be self employed for two years and then will average your last two years personal tax notice of assessment line 150 total income amounts. We have many self employed clients who cannot qualify based upon these numbers due to company write offs or through retaining earnings within their corporation. In this case we do have several other excellent options that we outline in the “self employed mortgages” section.
Income ratios (how much mortgage you can qualify for):
Lenders use a combination of two different ratios when determining how much mortgage you qualify for:
Gross debt ratio (GDS) – this is a measure of how much of your gross annual income goes toward your housing payments. The housing payments include: mortgage payments, property taxes, condo fees if applicable, and heat. This ratio as a general rule cannot exceed 35% – 39% of your total gross income.
Total debt ratio (TDS) – this is a measure of how much of your gross annual income goes toward your overall monthly payments. This includes your housing costs in addition to any other debt payments you have such as: vehicle payments, credit card, line of credit, student loans, and investment loans. This ratio generally cannot exceed 42% – 44% of your total gross income.
We are here to help and we want your business, please feel free to connect with us via phone, online contact form, or by applying online.