How To Qualify For a Mortgage With Altrua

When well organised, qualifying for a mortgage is a straightforward and enriching process that be broken down into four main areas. These areas or ‘Pillars of Lending’ include (1) Income, (2) Down Payment, (3) Credit and the (4) Property itself. For the lowest rate mortgages, strength is needed in each of these areas. However for alternative mortgages, strength in one area can compensate for some weakness in another. Ultimately the mortgage lending system, which is closely governed by the Federal Government of Canada, is designed to help promote stability and sustainable, enjoyable ownership.

Income must be able to support the mortgage payment comfortably. The Canadian financing system is set up so that if the applicant (known as the ‘covenant’ in industry terms) is not realistically able to afford the payments, or if there is greater risk of missed payments, there is less likely to be an approval at lower down payment amounts.

The main affordability formulas that mortgage lenders rely on are known as the Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). These ratios, which measure Before Tax Income Vs. Expenses, help determine how much house can potentially be afforded and what your maximum mortgage payment could be. The Government of Canada limits these maximums for under 20% down payment mortgages (high ratio mortgages). For 20% or more down payment, there can be more payment flexibility because lenders can use more of their own discretion, and can offer extended amortisation periods of up to 35 years. The GDS and TDS are explained further below:

GDS: The percentage of gross, before tax, annual income required to cover housing expenses only. Housing expenses must be less than 39% of gross income.

  • GDS = Monthly housing expenses ONLY (divided by) /gross monthly income
  • For example: Mortgage payment @ $ 1000/ month + property taxes @ $200/ month + heating/ air @ $200/ month + fire insurance @ $50/ month =  monthly housing expenses of $1,450. Gross monthly income is $5,000.
  • GDS = $1,450/$5000 = 29%, which is 10% less than the 39% maximum and fits.

TDS: The percentage of gross annual income required to cover payments associated with housing AND all other debt. This ratio must be less than 44%.

  • TDS = Monthly housing expenses + other monthly debt servicing (divided by)/Gross monthly income
  • For example: housing expenses = $1,450/mo + car loan = $500/month
  • TDS = $1,450+$500/$5,000=39%

So in both example cases, GDS under 39% and TDS under 44%, the applicant fits comfortably in the affordability range.

Salary Earnings: If income is paid as a salary, it is considered to be more stable and is most easily approved by a lender. Extra bonus or variable income is averaged over 2 years, and this can include the year of application if desired.

Guaranteed Hourly Earnings: Typically a lender will want to see a guaranteed minimum amount of hours as a base, and will contact the employer to verify the minimum hours. Any overtime or bonus pay can be used on a 2 year averaged basis using T4 tax slips.

Non-Guaranteed Hourly Earnings: Where the minimum hourly wage can’t be verified, a lender will typically average the last 2 years TOTAL income on the T4 slips and Notice of Assessment Taxable income to arrive at the usable application income.

Self Employed: For Self Employed mortgages, Line 150 on the T1 General Tax Form and Notice of Assessment is used as a 2 year average, and can be ‘grossed up’ from this base amount given the write-off’s inherent in self-employed income. To approve the application properly, T1 General Tax forms and Notice of Assessments over the past 2 years need to be provided up front to your Altrua broker with the application for self-employed mortgages.

There are many unique, wide ranging situations that can be worked with regarding income and Altrua is always able to advise you on exactly how income should be communicated to the lender.

Beyond income, credit, which ranges in a score from 500 to 900, plays a crucial role in lending decisions. Income can be high, however if credit has been negatively impacted in the near past – this can affect the qualification. All lowest rate mortgage lenders have minimum credit scores that they will accept, and if the mortgage is less than 20% down payment then the CMHC will impose minimum credit standards in a ‘gatekeeper’ fashion to all lenders.

This said, one of the key things to remember regarding credit, is that the score is always changing – and if there have been some mishaps in the past – these can be repaired relatively quickly with the right advice and decisive action.

Typically, a credit score (also known as a ‘Beacon Score’) of 650 or higher will be considered for approval by an ‘A’ lender that provides the low market rates. For the absolute best deals and discounts in the market, often a minimum credit score of 680 is needed.

Credit scores lower than 650 can certainly be approved for a mortgage, but the rate may be slightly higher. The closer to 500 a score gets, the higher the rate and down payment requirement. For low credit mortgages, often a 1 or 2 year mortgage can be approved as a short term solution, and after the 1 or 2 year recovery period, the lowest rates in the market can be applied for at that time.

If you have made your payments on time and had one or more credit lines for the past 3 years then your score will likely be high. If you are are unsure of your credit score – click here to go to Equifax Canada and discover your credit score.

A third aspect of mortgage approval is down payment, and the more of it you have, the stronger your application. For those considering a 0% down payment option, the two other pillars discussed of credit and income must be very strong. Most purchasers will use 5% or more for down payment, and when 5% + is used, all market lenders become available and the most favourable terms are offered to the applicant. It is for this reason, as well as to promote lower debt levels and more savings, that 5% or more in down payment is recommended.

As down payment increases, the CMHC mortgage default insurance is also reduced at each of the following down payment increments: 0%, 5%, 10%, 15%. At 20% down payment, CMHC is typically no longer needed. CMHC fees are added into the mortgage and are not paid upfront by the borrower. Check out CMHC premium amounts here.

At 20% down payment and higher, lenders can use more of their own discretion. At 35% + down payment or equity available, lenders are able to use their maximum discretion on mortgage approvals as Federal Government Regulation becomes more relaxed at this point.

Down payment is weighed with the other pillars – Income and Credit – and is used in combination to make sense of the entire application.

Generally speaking, lenders prefer fairly typical houses and condos in large urban areas. If a house or condo is seen in need of repair, like a ‘handy mans special’, or if there is something unusual about the property, like 1 bedroom in a 3,000+ sqft property, the lender may not approve the application without a very high down payment. When a buyer does not have a high, 35%+ down payment, and if a ‘condition of financing’ is not included in an offer to purchase – there is always risk that the application could be declined based on the state of the structure alone if the structure is highly unique or unusual – even if credit score and income are high.

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