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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