Debt Ratios: A Mortgage Broker’s Perspective [Special Collaboration]

Our friend Lister Boc has written a column on strengthening debt service ratio standards. For the average borrower, debt service ratio plays an important role in determining the approved amount for a mortgage loan. In the past, many creditors were willing to concede certain items to help buyers enter the real estate market. The new law changes issued by the Canadian Mortgage Housing Corporation (CMHC) made it possible to stop these practices as of December 31, 2013.

One of the most significant changes is how lenders calculate variable income

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The new rules provide that lenders can not use an amount that exceeds the average income of the last two years. This could have a significant effect on people who rely on commissions or who have a seasonal job. There is another major change affecting those with bad credit: a guarantor’s income can no longer be used in the calculation of gross debt or total debt service ratio. The income of a guarantor can no longer be used even if the guarantor lives in the house and is the spouse or common-law partner of the borrower. There are also changes to the way heating costs, rental income and secured and unsecured lines of credit are calculated.

For a complete list of what has changed in debt service ratio calculations, read Rob’s article. It is important to note that many of these policies are already implemented and respected by lenders. The purpose of these changes is to prevent creditors from over-playing with the numbers and to lend to high-risk borrowers. And while the changes in the mortgage industry since last summer have made life a bit harder for some buyers wanting to get loans, we believe it’s important to get pre-approved for an amount that you can actually allow you to pay back.

To find out how these new ratios might affect owners

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We asked Lister Boc some questions directly.

Question: Which of the new guidelines differs from the status quo, and how?

Answer: Most rules are already in place in the majority of institutions, but some creditors are more flexible and as of December 31, 2013, we can forget that! For example, some lenders use interest-only payments on unsecured lines of credit for calculating debt ratios. Yet, debt ratios will have to be calculated using 3% of the balance of all mortgage loans insured by CMHC. Some lenders have also lowered heating costs for calculations. The new guidelines are a bit more conservative, which means that it will be more difficult for some marginal borrowers to stay within the debt ratio.
Question: It looks like many of the new laws are for investors and the self-employed.

Do you think things are getting more difficult for these buyers since last year?

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Answer: In the past 12 months, it has become significantly more difficult to obtain approval based on reported income, especially if it is a loan of more than $ 100,000. The CMHC guidelines require confirmation of the flow of personal cash (supporting evidence). Borrowers should not expect to be satisfied with reported income if they need mortgage insurance.

Question: Are these changes too strict, or is it necessary?

Answer : Most of these rules are correct, but some of these measures eliminate exceptions that make sense. For example, banning the use of interest payments from the leveraged line of credit affects investors and can have a dramatic effect on debt ratios and mortgage approvals for these non-core borrowers. qualified.

Question: What do you think are the broader implications for the real estate market and the real estate investment market?

Answer : This is a differential impact that will affect a minority of borrowers. There will be no dramatic decrease.

Thank you again for giving us this interview and helping us to inform our readers Rob!

 

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