(Jan 29, 2024)
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In the unforgiving terrain of Canada’s contemporary mortgage qualification landscape, prospective homeowners face an uphill battle. On top of stress-tested high-interest rates, a persistent affordability crisis, and intricate newcomer policies, there is the ongoing challenge of participating in a real estate market characterized by what seems to be a constantly rejuvenating demand. In a hyper-competitive market where every cent of income matters, the question lingers: Is your mortgage pre-approval truly maximizing your purchasing power? As you grapple with the complexities of the current environment, untapped methods may exist to extract more from your financial arsenal. Could your mortgage qualification be underestimated or underqualified, leaving potential untapped? The answers lie within the following paragraphs—explore seldom-used income qualification gems that have the potential to be game-changers in your relentless pursuit of optimal mortgage qualification in what is perhaps the most challenging real estate market on the planet.
Following are 5 key qualification tips that are often overlooked, and if utilized, could be the ultimate difference-maker in securing your real estate purchase (or refinance):
(1) Application Process: Expect a hefty amount of document and information requests
I personally never encounter resistance when requesting documents from customers during the application process. However, new clients who have had to switch mortgage advisors due to late-stage qualification failures often attribute the failure to a poorly drafted mortgage pre-approval. Concluding a mortgage pre-approval with a brief phone call explaining your maximum qualification amount is irresponsible, especially given what’s at stake—likely the largest investment you will ever make. Mortgage pre-approvals should be in document form, including scenarios, interest rates, calculations, and, importantly, conditions. If your current mortgage pre-approval doesn’t fit this description, then you are not pre-approved.
Examples of pre-approval conditions (to be disclosed in your pre-approval document):
- If you increase your current debt load, your mortgage approval amount will decrease disproportionately
- If your credit score decreases below 680, your mortgage pre-approval amount will likely be reduced
- You must not be in arrears with the Canada Revenue Agency upon completion of your property purchase
- The interest rates quoted within a pre-approval are subject to specific conditions (be aware of them!)
- These are just a few examples; countless others exist
Steer clear of unsupervised rookie mortgage advisors. Ask them if they have a supervisor and request their contact information in case your qualification takes an unexpectedly restrictive turn.
(2) Income: Ask how much of your income is eligible for qualification
You’re probably asking yourself, why wouldn’t my income be eligible? Consider a scenario where an applicant earns a salary of $70,000/year and has also recently started a part-time job earning about $6,000/year. Full-time salaried incomes without probationary periods are simple to verify and often result in seamless approval. However, part-time employment/income is a different story. If the part-time employment is classified as casual, a 2-year average of employment with that particular employer is required. But, if the part-time employment is classified as permanent and/or guaranteed hours, then the applicant can qualify as per the current hourly rate. This could be a major boost, especially if the mortgage advisor defaulted to a two-year average where the prior year was a lower income.
Here are some other seldom-used income qualification methods:
- Capturing a 2-year overtime or bonus average and combining it with current earnings. This method packs way more punch than doing the default overall 2-year average based on the prior year where the applicant likely was at a lower pay rate
- When it comes to self-employed applicants, there are a million and one ways to qualify! Click Here to be redirected to my recent blog, “Mortgage Qualification Hacks for Self-Employed Applicants”
(3) Rental Income: There are at least 20 different methods of calculating eligible rental income
In places like Vancouver and Toronto with high real estate prices, rental income in the form of mortgage helpers (rental income from a basement suite within the property you intend to purchase) is often a decisive factor. Lenders have varying policies when it comes to how much of the rental income from a rental suite can be used as eligible qualifying income. The plain-jane standard in the industry is 50%, where 50% of the rental income is added to your overall qualification income. This often comes as a shock to many, as the common perception is that 100% of the rental income is eligible, but that isn’t the case (in actuality there are no lenders that accept 100% of the rental income).
When it comes to rental income, lenders vary drastically with their eligibility criteria. For instance, Lender A will allow you to use 50% of the rental income that is generated from your rental property and apply it as qualifying income. But Lender B is offering something different. Rather than applying the eligible rental income to your overall application income, they allow you to use it as an offset to your existing debt load and they further increase the allowance to 80%. As a result, you end up qualifying for significantly more!
(4) Networth: If you hold at least $250,000 in liquid assets, you enter another arena of qualifying
In many instances, applicants and their mortgage providers are completely unaware of this qualification gem. The qualification essentially allows you to boost your mortgage qualification dollar for dollar with your assets. For example, if you qualify for a $500,000 mortgage based on your verified income, but hold $300,000 in investments (or cash), the lender will boost your mortgage qualification to $800,000. For more detailed information about the High Networth Mortgage Program Click Here to read my past blog that reveals the key qualification criteria.
(5) 1-year band-aid mortgages: If all else fails…
Probably the most underrated and overlooked, this pathway has increasingly become prevalent in the past couple of years with the rapid escalation of interest rates. Within a span of 12 months, many homebuyers found themselves in precarious situations where they were blindsided by the fierce impact of generational high-interest rates. Mortgage approvals that were previously approved suddenly found their status severely downgraded, and in many cases, outright declined from their respective lender.
Thankfully, there was a solution. The Band-Aid mortgage providers, as I like to refer to them, stepped up and provided the relief that was needed to save home buyers from defaulting on their purchases. Not only did they salvage many transactions, but they arguably stabilized the entire real estate sector as a result. The value proposition from these lenders (formally known as “B” or “Alternative” lenders) is as straightforward as it gets: interest rates are generally 1.5% to 2.5% higher than traditional banks, qualification guidelines are loosened considerably, a fee of 1% to 2% is skimmed off the mortgage proceeds (therefore your down payment is proportionately increased), and lastly, the available terms generally range from 1 to 3 years. The objective of a Band-Aid mortgage is to secure your purchase (or refinance) with the intention to later refinance the same mortgage with a traditional lender (preferably after 1 year, or longer if required). Prior to committing to a Band-Aid mortgage, your mortgage broker should have a legitimate game plan that details your exit strategy (refinancing to a traditional lender upon the maturity date of the Band-Aid mortgage). If a 1 year timeframe is not realistic, then a 2 or 3 year term should be explored. This is a product that was traditionally geared towards applicants with bruised credit histories and income verification challenges, but lately, it’s broadened its reach to include applicants of all classes. Whether you are a high-earning medical professional awaiting your permanent residence status, or a self-employed plumber who declares a lower income for income tax purposes, this segment of lending is worthy of forming part of the mortgage broker arsenal of products and solutions.
Wondering if your mortgage pre-approval is optimized for maximum output? Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko. You can also call Marko on WhatsApp.
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Contact Marko, he’s a Mortgage Broker!
604-800-9593 cell/text | Vancouver (Click Here to schedule a call with Marko!)
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Email: gelo.m@mortgagecentre.com
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