These continual changes have made it increasingly difficult to qualify AAA clients. Applications
that were approved a few months ago are now being declined or approved with
What follows is
a quick recap of some recent guideline changes (keep in mind that each lender is
putting their own twist on every rule):
Some lenders now factor in a monthly payment for secured credit lines with zero balance. This means that even if a borrower isn’t
using their secured credit facilities, a payment will be factored into their Total
Debt Service (TDS) ratio. First National’s guidelines, for example, say that even
if a client owes nothing on a $100,000 secured HELOC, a payment of $383/month will
be included in debt servicing. (Their calculation is: (4.6% x the line of credit limit)/12 = the payment
per month). That adds almost $400/month to the TDS! For
a qualified borrower with $50,000 of income and a typical 2.99% mortgage, this could
reduce their maximum mortgage amount by roughly $60,000 – $70,000.
On revolving unsecured credit, monthly payments are being set
at 3% of the outstanding balance. At all but a handful of lenders, interest-only
or minimum payments can no longer be used when qualifying clients. That has quite an impact. Consider that a $15,000 unsecured line of credit has interest-only payments of $75/month.
Despite that, lenders routinely want a $450/month payment to be included in TDS.
Many lenders now calculate heating costs using a specific formula based on property
size. In days gone by
you could input $75-85/month for heat and no one questioned it. Now, homes
over 3,500 square feet have a “heat factor” of $115-$220 at some lenders. While this may be prudent, it again reduces a borrower’s potential mortgage size.
Conventional variable-rate mortgages and
fixed terms less than 5 years are now qualified using the Benchmark Rate. When implemented last year,
this change had a significant impact on how much mortgage a person qualified for.
To put this last
guideline into perspective, take the example of Mr. & Mrs. Smith. Both have been
employed full time in salaried jobs for 3 years. Each earns $60k/year. They
have credit scores over 800, a car loan with a $500/month payment and a $15k
unsecured credit line with $75/month interest-only payments. Add to that RSPs
worth $150k. Dream clients, right?
In 2012, the
Smiths easily qualified for a $640k mortgage when they purchased their $800k family home in the suburbs. Their mortgage agent got them a great rate of 2.89% for a
5-yr fixed with Lender ABC. And it was amortized over 35 years to improve cash flow
while their daughter was in university.
The Smiths recently
approached their mortgage agent to inquire about refinancing. Their
application was strong, with a loan-to-value of only 75%.
In 2012, the
Smith’s GDS/TDS was 29/35, so their mortgage agent never expected any approval
challenges. The agent prepared the refinance application for $680k and requested a new rate to be blended with the Smith’s existing rate of 2.89%. Then today’s new reality hit everyone.
Under the new
rules, these applicants will no longer be approved. Here’s why:
ABC must now qualify the Smiths at the Benchmark rate of 5.14% because they’re taking
a “blended” 4-year term (i.e., a term less than five years). The new qualifying rate of 5.14% is almost double their previous rate of 2.89%.
That pushes the Smith’s TDS ratio well over lender guidelines
Lender ABC can no longer offer 35 year amortizations. As a
result, the Smiths are now qualified at a 30 year amortization, again raising
their TDS ratio.
payment on the unsecured LOC has gone from interest-only at $75/month to $450/month, thanks to the mandatory 3%-of-limit minimum payment (used for approval purposes).
have pushed the Smith’s ratios from 29/35 GDS/TDS (under former guidelines) to
41/50 under today’s guidelines. That’s despite no increase in their risk as
deal could be restructured, but it provides a very real example of
the challenges now facing mortgage professionals. Guideline tightening over the
past 12 months has made it significantly harder to qualify clients,
and I doubt we have seen the last of the changes.
Karen Beattie is Business Development Manager at NEXSYS Financial Inc. Karen has been involved in the Canadian Mortgage Industry for 20
years, starting at the lender level and then working as a mortgage agent. She now specializes
in underwriting and document validation.
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