Lenders: Making a list checking it twice....
Author:
Michael Campagna
Date: March 1, 2016
In the old market pre 2008, lenders were looking for ways to say
‘yes’, because the rate of return was worth the risk. Today,
lenders are looking for ways to say ‘no’. As such, approvals and
declines are not based on the client per se but on the Broker.
Many brokers are working in a 2008 mentality during a 2013
reality. Lending is not necessarily based on the ‘yes’ or ‘no’
model it used to be, but is based largely on probability. In the old
market you could stuff a deal in the box and it was approved, in the
new market, if you stuff a deal in the box it is simply considered.
Therein lays the problem. Many brokers in general think that
because the deal is in the ‘box’, it is going to be approved. But
when the deal comes back declined, the broker is flabbergasted.
Therefore, the idea of importance isn’t about what the lender is
looking for, the real question to be addressed is: what the broker
is looking for?
Essentially, when a individual is purchasing a property lenders
look at four variables when considering a file for approval: credit,
income, property, and down payment/equity. They don’t just look at
one variable or another, they look at all four. So you could have
great credit and solid income, but if the property isn’t ideal in
the lender’s eyes, the deal could be declined.
Credit:
A credit score can range anywhere from 300 poor up to 900. If a
mortgage is greater than 80% of the value of the property 20% down
payment or less, the minimum credit score a lender is able to accept
is 600. This is because a lender must first seek default insurance
for the mortgage by a 3rd party insurer CMHC, Genworth, and Canada
Guaranty. The credit standard is set by the insurer and not the
lender. If the mortgage is less than 80% of the value of the
property, a lender can accept a credit score as low or as high as
they see fit. This is because a lender does not have to obtain
default insurance for the mortgage and therefore the score standard
is set by the lenders internal policy.
The credit score is only half fraction even of the battle. When
lenders assess ones credit the factors to be addressed are as
follows:
So from a lending stand point, credit would be optimal if there
are minimal late payments showing, low balances on loans being rated
by the report, and a credit profile that has a long standing history
with 3-6 accounts being reviewed.
Of course, this is general because each credit file is reviewed on
a case by case basis. But, in essence it serves a beacon that one
should consider about his or her credit rating.
Income:
Lenders view income in two ways: qualified or stated. Qualified
income is referring to income that is able to be proven via proper
documentation tax returns/ T4’s etc. A borrower under this camp
will be someone who is paid hourly or salary. Or, a Self-Employed
person whom can prove their income with the amount stated on their
personal Tax Returns. Essentially, the amount of income being proven
will be the deciding factor as to how much one is able to be approved
for. A lender will take gross income and compare it to all
liabilities and produce the magical number.
Stated income is more
for commissioned sales people or business owners. Under this income
type, lenders are not looking to verify income per se because, as we
know, many self-employed individuals have quite a few ‘write-offs’,
and their Tax Returns don’t portray their income accurately. What
lenders are looking for is 2 years confirmation of
Self-employment/commissioned sales, strong credit, and no personal
taxes outstanding.
Down payment:
The minimum down payment for a income qualified deal first time
buyer or not is five percent of the purchase price, and 10% for a
stated income deal. Of course, this is assuming the applicant
applying for mortgage financing will fit all other program guidelines
set by the lender. The main element for this down payment amount is
that the property be owner-occupied. If the purchase is for an
investment property, the minimum down payment a lender will consider
is 20% of the purchase price. With many new rules coming to light in
the public, there is ambiguity surrounding the amount of money one
will require to purchase a home.
Yes, generally speaking the larger the down payment the more
flexibility, but the days of, "big down payment and done deal,”
are over.
Ideally lenders appreciate a down payment that is from a person’s
own resources:
Lenders may consider a down payment that is gifted or borrowed or
from other resources other than the borrowers own but this depends on
the overall file.
Property type:
When lenders are reviewing the risk of a property they will
consider the location, dwelling type, and condition of the property
in question. The overall guiding theme is marketability, because if
the file ends up in foreclosure, a lender will want to sell the
property ASAP.
If a property is niche, the deal may be perfect in all other
respects but be declined solely due to property. Properties that are
more difficult to fund are hobby farms, mobile homes on pad rentals,
rural locations, acreages greater than 10 acres, and properties that
have a revenue stream such as horse boarding or some other type of
income generating activity. This is because if the file does end in
foreclosure the saleability of the property is not strong.
What lenders are looking for is standard residential dwellings
that are characteristic of its surrounding area. For example, an
apartment in Vancouver city versus a heritage home in Vancouver city.
The heritage home is very specialized and will only appeal to a
nominal fraction of the purchaser market at best; whereas the
apartment is standard and will appeal to a large segment of
purchasers in that area.
To conclude, the four factors as stated above, desire a high
amount of preliminary analyzing with a mortgage broker especially in
this current mortgage market, before determining which lender/
lenders a file should be submitted to. There are multiple lender’s
and programs out there, so the way a file should be presented when
submitted could vary quite a bit from lender to lender.
Probability
of approval increases dramatically when a Mortgage Broker is highly
tactful with their submission.
Thus, in today’s market is it always best to be thinking in
terms of probability and not certainty. If the deal is viewed in
terms of certainty the final product is usually sloppy work, which in
turn translated into a deal being declined when in reality it could
have been approved.
Mortgages Financing Mortgage Broker Lending Criteria
