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How to qualify for a mortgage when your current income doesn’t cut it

Story by Robert McLister - Source: msn.com

It’s a common tale across Canada.

People see rates coming down; they want to buy a home — perhaps because they don’t think prices will stay down for long — but they can’t prove enough income to get a mortgage.

What to do? Well, unless you’re a new professional like a doctor or dentist, or you qualify for rigid niche lending programs, or you can get approved based on a significant net worth, major banks will likely show you the door.

Fortunately, big banks don’t completely monopolize Canada’s mortgage market. Alternative lenders will often lend you more based on your overall ability to pay. And that ability doesn’t just rest on your income today.

Here are four ways non-Big-Six-Bank lenders can qualify you when your current income doesn’t cut it.

1. Contributory income

Family members often chip in on bills — think of grandma living in the guest room or your folks in an in-law suite. These family members may not be on title to the property, but alternative lenders will consider their payments when helping you qualify for a mortgage.

Some lenders will also include well-documented part-time or gig income (handyman, Uber driver, etc.) without demanding the usual two-year income history.

“Canadians are great at finding creative ways to earn more money for their family,” says Grant Armstrong, head of mortgage originations at Questrade Financial Group’s Community Trust Company. “As a lender in these cases, we’re looking for reasonable income that shows a consistent pattern and can be documented for the last three, six, nine or 12 months.”

For some borrowers with new cash businesses on the side, bank statements or reference letters might be all the documentation needed. Try getting that approved at a big bank, especially if you have a lower credit score.

2. Future income

For professionals such as doctors, dentists or lawyers, an income spike down the road is almost a given, and many lenders are willing to bet on that.

Non-professional borrowers may also have qualifying future income, including those expecting child support, alimony, rental or pension income in the near-term.

3. Liquid assets

Some lenders calculate how much you can afford with the assumption you could turn your assets into cash. “If you have significant assets, we have programs that can leverage that for the next few years,” says Armstrong.

Cash, or anything that can be readily converted to cash, can help a lender justify exceptions to its debt ratio limits (i.e., the maximum percentage of gross income a lender allows for housing and debt payments). Some lenders will even consider RRSPs as a way to justify a bigger loan amount.

4. Future assets

Borrowers who’ve listed another property for sale, have a trust fund coming available or expect an inheritance during the mortgage term all have future cash availability . Alternative lenders will often count a percentage of those assets as a means of debt servicing or paying off the mortgage.

Some will even consider retained cash that’s sitting in a business account, as long as it’s unencumbered and you have unfettered access to the money at any time.

The tradeoff

In life and in mortgage finance, flexibility often comes with a price tag. Alternative lenders charge higher rates due to their increased cost of securing funds and the greater risk involved.

Typically, borrowers who are otherwise qualified will pay non-prime lenders a rate that’s at least one to one and a half percentage points higher, plus a one per cent fee — provided they have a solid credit profile, at least 20 per cent equity and a marketable home. Less equity might push your interest rate up by at least another 30 to 50 basis points, if the lender even agrees to the deal.

If you’ve missed multiple payments in the last few years, or your home isn’t in the city or ‘burbs, or the mortgage amount is well over $1 million, or it’s an investment property, expect to pay materially more.

And about that equity — it’s crucial for non-prime lenders. They demand a hefty equity buffer as insurance against the higher default rates typical of non-prime borrowers. That’s the only way they can ensure they’ll recover their funds if things go south and the borrower doesn’t pay.

In general, the sketchier your credit or wonkier your income situation, the more equity you’ll need, sometimes up to 35 per cent or more. Some lenders allow second mortgages behind their first so you can borrow more, but you won’t like the interest rate on that second.

The takeaway is that there are plenty of tools in a mortgage broker’s toolbox to get a borrower approved. If you can’t get it done at a bank but still want a mortgage, it essentially boils down to one question, “Exactly how are you planning on making your mortgage payments today, tomorrow and a year from now?”

Even so, just because someone can get approved for a mortgage doesn’t mean they should. All these workarounds are meant for people who can pay their mortgage without question. If you have even a hint of worry about that, keep on renting.

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Canadians Are Saving A Lot More Than Americans—It’s Not Good News

 


Canadians are suddenly big savers while Americans are spending like drunken sailors on pay day. On the surface, that sounds like good news for Canada but it’s traditionally a sign of growing consumer hesitance, slowing the economy. At the same time, the resilient American consumer is leaning into further consumption, pushing their economy to defy expectations. Households in these two countries have essentially reversed roles since the pandemic, warns a major bank. 

Is Saving Money Good or Bad? It’s Complicated  

Generally speaking, saving money is a good thing—everyone should have some cash for a rainy day. However, a sudden shift in saving behavior signals that households are changing priorities. That provides us with an important signal for consumer sentiment.

Households spend when they feel opportunity is abundant, meaning they save less. A consumer is more likely to buy themselves a little something extra if they feel their job is secure. No need to save extra since the economy is so strong, they can find a new job if things go south. Since one person’s spending is another person’s income, this helps to further accelerate economic growth. 

Rising savings indicate spending reservations. Households are more likely to sock away extra cash if they’re worried about unexpected expenses, or a lack of income. As career prospects erode, so does spending. If one person’s spending is another person’s income, a lack of spending is someone else’s reduced income. This drags the economy, producing job losses, reducing income further, reducing spending… you get the picture. 

Canadian Households Are Saving A Lot More Post-Pandemic 

Canada’s households aren’t sold on the positive economic data that’s been trumping expectations. The household savings rate came in at 6.2% in Q4, climbing over the past year. A recent research note from BMO highlights this is a whopping 4 points higher than the average in 2019. Since this cash is pulled from spending, it understandably is contributing to slowing growth. That’s really emphasized when adjusting for the country’s population boom. 

American Households Are Spending A Lot More

In contrast, American households continue to demonstrate they haven’t bothered with doomsday calls. The latest data shows a savings rate of 3.8% in January, trimming 0.6 points over the 12-months following. BMO’s calculations show prior to the pandemic, households socked away 7% of their income. The extra spending is undoubtedly a major contributor to their continued economic boom.  

“The resilient U.S. consumer has been a big factor behind the surprisingly sturdy U.S. economic growth of the past year, but also for the global economy,” explains Douglas Porter, chief economist at BMO.

Adding, “It’s a very different picture in Canada, where the savings rate has moved higher over the past year and remains well above 2019 norms.

American & Canadian Households Have Reversed Roles Post-2020

The shift marks a departure from the post-Great Recession economy, where Canadians were faring better. 

“Effectively, the roles have reversed between U.S. and Canadian consumers-in the decade after the GFC and pre-COVID, Americans were much bigger savers than their Canadian counterparts, while the reverse is now true,” he says. 

His point fits textbook expectations. After the Great Recession, American consumers pulled back on spending as their country was hit with the worst recession ever. Canadian consumers were unscathed, leaving them feeling invincible and willing to take on more risk.  

“That’s a return to conditions seen from 1975-1995, when Canadians were the bigger savers,” according to Porter.  

A time period where the country experienced substantial growth, but also a lot of turbulence. It was a boom-bust economy, and not as stable as the comfortable growth many are accustomed to.

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The Oracle of Omaha is among the top five wealthiest in the world.  So what can the Average Jane or Joe learn from him? Plenty, it turns out.  

Call/text Bernie 778-881-0025 for any questions you might have.

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Multiple Realty Ltd.

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All MLS SOLDS Metro Vancouver - Last 2 Years

IT'S ALL ABOUT YOUR MONEY. FREE - MLS SOLD Listings Last 2 Years. Check Your Neighbor's Home and Any Home Across the Region. Just click the graphic below.

Call/text Bernie 778-881-0025 for any questions you might have.

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Multiple Realty Ltd.

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