Qualifying for an Investment Property Mortgage

Posted on January 13, 2023January 13, 2023 by markogel@gmail.com

(January 12, 2023)

Here are 5 key points to be aware of when qualifying for a mortgage for the purpose of purchasing a rental/investment property:

Keep your day job. Your personal income is still one of the most impactful parts of your mortgage application. If you are self-employed, you will need an established tenure of at least two years and your declared income will have to be adequate enough to service the mortgage (after all applicable rental income offsets are applied). Many of the (so called) self employed programs in the market are ineligible when it comes to purchasing investment/rental properties. Unless you declare a very high self employed income (Line 150 of your Notice of Assessment), salaried/hourly jobs are typically a more favourable income type for qualification purposes.
If you own additional properties with mortgages, consider maximizing the amortization periods. This could significantly reduce the overall debt servicing ratio of your application, thereby enhancing your chances of qualifying for an additional property (or even multiple properties).
Lenders do not accept short term rental income (i.e. property share platform/sites) for qualification purposes. Instead, they use long term market rentals/leases. If you have not yet secured a tenant for your rental property, the lender will request a market rent evaluation from an appraiser which will be used as qualifying rental income. For example, if you are able to generate $7,000 per month in short term rental vacancies, but the going rate to lease your property is $2,500/month, it is the $2,500 that will be used for qualification purposes, not the $7,000.
Once the qualifying rental income has been determined, it is then applied to the rental income formula of the selected lender. The amount of the rental income that is eligible for qualification purposes varies significantly from lender to lender. Lenders will allow you to use anywhere from 50% to as high as 80% of the rental income as eligible qualifying income. Furthermore, depending on the lender, the eligible income is either added to the overall qualifying income of the application, or it is applied as an offset against the overall liabilities of your application. The more impactful of the two is when a lender applies the rental income as an offset against the overall liabilities of your application. In some cases, an applicant will opt for the higher interest rate lender simply because they incorporate the liability offset method to their adjudication process rather than the far less impactful add-to-overall-income method
Select the product, term and amortization of your rental property mortgage. Do so with the mindset of setting up financing for a small business. This is a critical decision as it cements your highest fixed expense cost – your mortgage payment. Analyze the different terms, rates, and amortizations and determine which is most suitable for you. This is where you can firm up your cost and expense ratio and determine the outcome of your monthly cash flow. Will you have a positive cash flow where your rental income exceeds your mortgage payment and other peripheral expenses (i.e. property tax, maintenance, contingency, etc)? Or will you have a negative cash flow where your mortgage payment and peripheral expenses exceed your rental income? Or perhaps it might be something in between? Whatever the case may be, most success stories adhere to one main principle to drive their decision making process – Remove emotion from the equation and let mathematics drive your next move. If the math doesn’t add up, don’t do it.

Interested in purchasing your first rental property, or expanding upon your current rental portfolio? Call or text Marko Gelo right now at 604-800-9593.

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The Key Driver for all Mortgage Approvals

Posted on December 6, 2021December 6, 2021 by markogel@gmail.com

(December 5, 2021)

Intro (pre-amble): up to 10:56 mark of podcast (Loan-to-value ratios mean everything | watch succession and yellowstone | list your home on thursday’s | mortgage qualification = guilty until proven innocent | interest rates)

How to catch a break in Canadian mortgage qualification:

The criteria for mortgage qualification involves fairly deep analysis of your personal income generation, your history of handling mainly unsecured consumer credit sources (like credit cards, lines of credit, car loans) and lastly, the amount of skin you have in the game – the down payment, or if refinancing, the current equity stake in your property. But the main driver and gatekeeper to all of the qualification tiers is the loan-to-value ratio (aka LTV). The loan-to-value ratio is exactly what the term implies. Let’s say you would like to purchase a $1M property with a down payment of $200,000, or you want to refinance a $1M property up to $800,000 – the LTV ratio would be 80%. In both scenarios, the loan would be $800,000 and the value of the property, $1M…therefore, the loan-to-value ratio would be $800,000 divided by $1M equals 80%. From here, lenders incorporate pre-determined risk factors and scale their qualification criteria, accordingly. Generally speaking, the higher your down payment (or equity position), the less rigid the qualification guideline.

Here is a brief outline summary of the key Loan-To-Value thresholds:

up to 95% LTV – the least skin in the game, you will rarely (if ever) get exceptions from lenders. You are an inside-the-box applicant and need to fully comply with the standard qualification criteria. Regardless of which lender you team up with, the outcome will generally be the same…the lenders will all qualify you for the same amount and approximately the same interest rate (within a negligible margin)
Up to 90% LTV – a few more qualification programs become available in this qualification bin, but still rigid qualification criteria with very little exceptions
greater than 80% LTV – substantially reduced insurer premiums and a more pragmatic approach to exceptions (i.e. proceeding with an approval despite a light credit history, or recently recovered credit mishap, or remaining probationary period with employer)
80% LTV and lower – the entry level conventional, uninsured lending zone. Ironically, an increase in rates (often the highest interest rates as it falls just outside the insured safe haven zone, but only at the doorstep of big down payment territory). Today’s 20% down payment is like yesterday’s 10% down payment…not as powerful and influential as you might think. Still an impressive milestone, but not the money-talks arena.
75% LTV and lower – even better than 80%, a few more unique and niche qualification guidelines open up to you. Rates get lower and more exceptions are granted.
and finally, the mother queen of the LTV scale…65% LTV – this is the big leagues, this is where you get rewarded for all the hard work of either accumulating your prized 35% down payment or owning a property with a comforting equity ratio…just the right amount of equity to creep out of all the lenders risk-pricing parameters. Best possible interest rates and significant qualification flexibility from lenders.

Contact Marko, he’s a Mortgage Broker!

604-800-9593 direct Vancouver (Click Here to schedule a call with Marko!)

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Rental Property Mortgages – how to qualify for them.

Posted on November 29, 2021November 29, 2021 by markogel@gmail.com

(November 29, 2021)

Intro (pre-amble): up to 14:46 mark of podcast (Rental Property Mortgages | Investors flooding market? | Going long on rates | Real Estate & Currency)

Qualifying for a mortgage when purchasing or refinancing a rental property can get very confusing.

Here are the key qualification criteria when qualifying for a Rental Property Mortgage:

the minimum down payment to qualify for a rental property mortgage ranges from 20% to 35% (refinances are limited to 65% of the appraised value)
rental income generated from the property does not necessarily translate into direct qualifying income. 50% to 95% of the rental income is eligible as qualification income (varies radically from lender to lender)
the rental income eligibility is classified as either one of the following (depending on the lender and type of income):
- General Qualification Income (least preferred): the mortgage balance is maintained in the application and becomes part of the overall debt load that needs to be serviced for qualification purposes
- Offset Income (most preferred, best bang for your buck): the mortgage balance is removed from the application and a positive or negative offset figure is added to the overall application depending on the lenders offset calculation
There are (3) types of rental property classifications and their income qualifying parameters are unique and independent of each other:
- Basement Suite rental: when the mortgage holder resides in the property and rents out the basement suite
- Subject Rental Property: the rental property mortgage that the mortgage holder is currently applying for (purchase or refinance), and
- Existing (or Stand Alone) Rental Property: rental properties that the mortgage holder currently owns
- All three of the property classifications can have unique eligibility criteria for qualifying income allowances. For example, a monthly rental income of $2,000 can either boost or weaken an overall application depending on their respective property and rental income eligibility classifications.
All lenders have limitations when it comes to the amount of properties they deem acceptable for a single applicant. For example, one lender may allow for a limit of 3 properties per applicant (the one they currently reside in plus 2 additional rental properties) whereas another lender may allow for up to 14 accumulated properties under ownership.

Mortgage Brokers are a key resource for individuals who purchase rental properties as they have access to multiple lenders with varying qualification guidelines.
Check in for more on rental property mortgages in future posts!