With real estate prices as high as they are, qualifying for the required mortgage can be challenging for many people. One advantage to using a mortgage broker is that we have options with big banks, as well as many other mortgage lenders. Some with more flexible guidelines that may allow you to qualify for a considerably higher amount than what you can expect from a major bank.
If you have a down payment of less than 20%, then your options will be limited by CMHC guidelines. But if you have a down payment of 20% or greater then this can open up additional options. Rate and overall cost of the mortgage can be higher in some cases, but it can mean the difference between getting you into a home that is ‘okay’ vs getting you into a home that you and your family will truly love.
I’ll explore seven different ways that can be used to get you into the home of your dreams:
- Go with a variable rate
- Pay off debt
- Purchase a home with a rental unit
- Choose a lender with more flexible guidelines
- Choose a longer amortization
- Consider using a B lender
- Private lenders
1. Go With A Variable Rate
You may have heard of the mortgage stress test, which means that you need to qualify based on a higher rate than the one your payments are based on. The stress test is another way of saying qualifying rate. It is the higher of the benchmark rate set by the Office of the Superintendent of Financial Institutions (OSFI) or 2% above your contract rate (the rate your payments are based on). At time of writing this blog, the benchmark rate is 5.25%.
Here’s how this works
Let’s say you are offered a 5 year fixed rate of 4.19% and a 5 year variable rate of prime -0.70% (currently 2.50%). As 2% above the 4.19% is 6.19%, this is higher than the benchmark rate of 5.25%. This means that you’ll need to qualify as if your payments were based on 6.19%.
If you chose the variable rate, then 2% above the contract rate is 4.50%. As the 5.25% benchmark rate is higher, this is the rate that is used for your qualification.
This alone will qualify you for roughly $75,000 more than you could expect if you chose the fixed rate in this example.
You can read more about this in my recent blog on Will You Qualify For A Larger Mortgage With A Fixed or Variable Rate?
2. Pay Off Debt
Carrying a balance on a credit card month to month or having a large car payment can have a significant impact on what you’ll qualify for. It doesn’t matter how low your minimum payment is on your credit cards. Mortgage lenders will use 3% of the balance as your minimum monthly payment regardless. For example, if you carry a balance of $10,000, then $300 per month will get added to your liabilities. If you tack on a car payment of $500, then this will drop your maximum qualified amount down even further.
In some cases you can carry a certain amount of debt without having it impact your qualifying ability, but if you are looking to qualify for the maximum then you’ll need to keep your debt to a minimum.
Using the above example of $10,000 owing on a credit card and a $500 car payment, your maximum mortgage amount can be reduced by anywhere from $25,000 to as much as $150,000.
The difference can be substantial.
If you have additional funds available to pay out some, or all the debt, then this could mean the difference between qualifying for the home you want or shutting you out of the market entirely.
Additional funds can come from a bank account, investment, gift from an immediate family member, or can even be as simple as reducing your down payment if you are going in with higher than the minimum requirement.
For example, let’s say you have $150,000 in household income and a $300,000 down payment. You have credit card debt of $10,000 and a car loan with an outstanding balance of $10,000 with a $500 monthly payment.
If keeping the debt in place, then you would qualify for a maximum mortgage amount of $762,000 (based on property taxes of $5,000). Add your $300,000 down payment and you have a maximum purchase price of $1,062,000.
If we reduce your down payment by $20,000 to pay off the debt, this will boost your maximum mortgage amount to as much as $908,000. Add your new down payment of $280,000 and your maximum purchase price jumps to $1,188,000.
In the above example, paying out only $20,000 in debt gives you an additional $126,000 in buying power.
3. Purchase A Home With A Rental Unit
Purchasing a home with a second unit such as a basement apartment can also boost your maximum qualified amount. Even if the unit is empty, the estimated market rent can be considered towards your income. In the majority of cases, only 50% of the estimated rental income would be added to your gross income. For example, if the basement rented for $1,500, then $750 of it would be used, which boosts your annual income by an additional $9,000.
While this doesn’t sound like much, it could qualify you for an additional $50,000 to $125,000 depending on the lender.
4. Choose A Lender With More Flexible Guidelines
We have access to lenders who can make exceptions on your maximum debt-to-income ratios, which can have a big impact on your qualifying amount. This alone could get you another $100,000 on your mortgage or even more.
There are also some lenders such as credit unions who are provincially regulated, which means that they are not obligated to use the stress test explained above. This means that they have options to qualify you based on your contract rate (the rate your payments are based on) rather than using the higher stress test rate. Fixed rates would be your only option in this case, and rates are a bit higher than they would be if we stayed within the limits of the stress test.The rate difference can range and usually ranges between 0.05% to 0.50% higher, depending on your situation and what promos are available at the time.
This could qualify you for an additional $80,000 – $175,000 depending on your situation.
5. Choose A Longer Amortization
A longer amortization will lower your payment which will in turn lower your debt-to-income ratio. Going from a 25 to a 30 year amortization could qualify you for an additional $60,000 to $175,000 depending on your situation. The difference can be huge.
If you would prefer to keep your amortization to 25 years, but would still like to maximize your qualifying eligibility then you can always use your prepayment privileges after closing to increase your payment to match the payment of the 25 year option. If you implement this right after closing and maintain it throughout the term, then you’ll have a mortgage that is 100% equal to a 25 year amortization from the start. This gives you the benefit of maximizing your mortgage amount, while minimizing the amount of interest paid over the term.
6. Consider Using A B lender
If none of the above options will get you into your dream home, then the next best option would be to go with a B lender. Note that the B designation has nothing to do with the quality of the lender itself. They are simply alternative lenders with more flexible guidelines.
B lenders specialize in applicants that do not fit within the qualifying criteria of A lenders. While they often cater to those with bruised credit, they also have much more flexible debt-to-income guidelines.
This means that borrowers with solid credit and income can use them to significantly boost their maximum qualified amount well above any of the options I’ve already discussed.
Depending on your situation, a B lender can potentially get you an additional $300,000 to $600,000 over and above the standard qualifying guidelines.
SIGNIFICANT difference!
As B lenders specialize in mortgages that are considered to be a higher risk, higher rates can be expected. The difference usually ranges from 0.60% to 1.50% higher than the lowest rates from an A lender.
B lenders also charge a lender fee which is usually 1% of the mortgage amount. The lender fee will be part of your closing costs if purchasing or will be deducted from the mortgage proceeds if refinancing.
I would recommend checking out my blog on What Is The Difference Between an A Lender and a B lender? for more information.
7. Private Lenders
If a B lender still doesn’t qualify you for what you need then your only other option would be a private mortgage. Rates on private mortgages can range anywhere from 6-8% in most cases and carry additional fees of anywhere from 1-3% depending on your situation.
As private mortgages are no doubt expensive, which is why I only recommend them in extreme cases where no other option exists. They serve their purpose and can be great for bailing someone out of a tricky situation.
Yes, they are expensive when comparing them with A or B lender rates. But losing your down payment is also expensive, and a private mortgage can sometimes be the answer to a problem that might not have any other viable solutions.
Private lenders use more of a ‘common sense’ approach, and do not follow any sort of debt-to-income limit. Their biggest concern is that the borrower can make the payments, and that they have an exit strategy. For example, a plan to sell the home in a year or refinance to a different lender when their circumstances change.
There is no limit to how much more you would qualify for with a private lender as every situation is reviewed case by case.
I talk about private mortgages in detail in my book, Beat The Bank – How To Win The Mortgage Game In Canada.
Conclusion
While mortgage brokers can often get you lower rates than you can find on your own, they also have options to get you qualified for a larger amount. As long as you have a down payment of 20% or greater, then any of the above options can help to give you the edge you need to get you into your dream home.
We all want to save as much money as we can by securing the lowest mortgage rate possible. At the same time, we also want to have the highest quality of life. It’s about finding the right balance that will put you into the perfect situation for you and your family.
We can review your situation in detail and advise you of the lowest cost option that will get you into the home of your dreams. Buying a home that might be below your ideal standard of living will put a roof over your head, but it can also have a negative impact on your happiness and quality of life. As long as you can comfortably manage your payments, then an alternative option might be worth considering.
Reach out to us at pmteam@citycan.com and we’d be happy to discuss all your options.
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