Hi, everybody. Rowan Smith from the Mortgage Center. I want to talk today about self-employed people and what the banks want to see from you in terms of the income documentation.
Like everybody else, they want to see notices of assessment to prove that you’re filing your income-tax, as in you have no arrears, and they want to see how much your filing on there.
But what about somebody who’s been a plumber for 25 years and finally decides to go out on their own. They go out on their own and they’re making way more money, but they’ve only been doing it for a year and a half.
Here’s the thing, that’s a tricky situation for a bank. The bank wants to see that you’ve got a two-year track record of income. But if you were employed back then and now you’re self-employed, how do they make the connection?
Now, not all banks, but several of them have a much more open idea here. What they’ll do is they’ll look at your historical earnings as a plumber, or whatever your job was. As long as you transitioned into self-employment in the same industry doing the same thing they’ll use an average of income over those years, including your start-up years, but also including your years as a salaried employee.
This is particularly important for a guy who’s been self-employed for only one year but has been doing something for 25 years. Often times they move to self-employment not because they were foolish but because they saw there was a lot more money to be made if they were the boss rather than just collecting a salary.
So, if you know somebody in this circumstance, someone who’s been told, “You haven’t been in business long enough,” but they’ve been doing the same job for a very long time, have them contact me. It’s Rowan Smith from the Mortgage Center.
Hi, everybody, it’s Rowan Smith with the Mortgage Center. I’m here to talk about biweekly payments and why they pay your mortgage down faster.
Now, I want to use a nice simple example to show you why this works, because it’s no magic and it has nothing to do with just making more frequent payments. You are, in fact, paying extra money when you pay a biweekly accelerated and you’re paying it down quickly.
So, here’s how it works. Let’s use a nice round number of 1,000 dollars. If that was your monthly mortgage payment, you would pay 12 times a year, you’d pay 12,000 dollars throughout the year. But if you were paying biweekly accelerated, they chop that payment in half.
So, 500 dollars times, times how many? Well, there’s 26 biweekly payments in the year. So, there’s not 24. People often confuse that, because they assume 12 months, 24 payments. There’s not. There’s 26 biweekly payments throughout the year.
It’s like when, if you’ve ever had a paycheck that comes in every 2 weeks, and then, twice a year, you’ll receive a paycheck, but you won’t have the corresponding obligations. It’s almost like found money. But it’s not. It’s just because the biweekly payments are 26 times throughout the year.
So, 26 times 500 is 13,000. So, like I said, on monthly, with 12,000. On biweekly, you’re at 13,000. So, you’re actually paying 1,000 dollars or one full extra payment per year. That has an effect of shaving several years off your mortgage. Depending on 25 or 30 years, it’s anywhere between 4 and 5 years that it knocks off right off the top.
So, if you want to pay it down a little bit quicker, accelerated, or biweekly accelerated, is the way to go. If you’d like that, and you know somebody else would like to pay down their mortgage faster, have them contact me.
Hi, everybody. I want to address a very common myth, and that’s that people think their variable rate mortgage, because it is open to fluctuations, is in fact an open mortgage. That’s not the case. There’s a lot of confusion as to what is an open mortgage versus a variable mortgage versus a closed mortgage or a fixed mortgage.
So, a fixed mortgage, well, obviously, your rate is fixed. You don’t have to worry about fluctuations in prime rate. For whatever the length of your term, whether it’s one or five years, your rate is fixed. Now, all fixed rates that we get here are closed. Meaning, to break that term — if you sell the home or you try to refinance during the term — you’re going to owe.
Typically, the penalty is the interest rate differential, the greater of the interest rate differential or three months of interest. Now, if rates have fallen substantially, you can expect the penalty to be quite large because it will be the interest rate differential.
If you do a search, some of the other blogs that I’ve done on penalties, you’ll see that there’s — I’ve explained the method of interest rate differential penalty calculation at a little more length. But in any case, if you have fixed — closed in almost every single case.
If it’s not a fixed or closed, then you’re going to be looking at a variable rate. Now, there is two types of variables — variable open and variable closed. The only difference between the two, other than rate, is that variable open can be paid off at any time with no pre-payment penalty whatsoever. The variable closed typically has a three-month interest penalty.
So you say, “Well, why would anybody take variable closed when they can take a variable open?” The difference is rate. Variable opens typically right now run you anywhere from prime plus 0.8 to prime plus 1.0. Prime rate is 3%, so that means your rate would be 3.8% to 4%.
Compare that to a variable closed mortgage will be at prime minus 0.75 or prime minus 0.8. So you’re looking at almost a point and a half to two-point spread between the two. So you can be paying 2.25% or you can be paying 3.75%. Clearly, the variable closed is a better deal if you’re going to hold the property for any length of time.
So people often come to me and say, “Well, I intend to sell it maybe in the next year or something.” Well, even in those cases, oftentimes the savings over a year-long period of time of getting the lower variable closed rate is better than paying no penalty, but paying a much higher rate as you go along.
So the important distinction here is that your open mortgage, you want to figure out how long are you going to hold that property? Open and avoiding a penalty may sound nice in principle, but if you actually end up spending thousands of dollars more over the life of the mortgage, why bother avoiding the penalty just to pay more monthly? For the Mortgage Center, I’m Rowan Smith.
Hi everybody, it’s Rowan Smith with The Mortgage Center. We’re going to try something a little different this week, and we’re going to cover something that’s very commonly requested of me, which is details on debt servicing, what is it, and how to calculate it.
So there’s two main ratios that the lenders use when they’re calculating debt servicing. The first is GDS for gross debt service, and the second is TDS for total debt service. Gross debt service or GDS, which is the first ratio we look at includes your principal, interest, taxes and heat, and what we’re trying to do is a find a percentage of your gross income that this equals.
So principal and interest is effectively your payment, so whatever your payment is plus taxes and heat. A good rule of thumb is that GDS should not exceed 35%. I mean, yes, there’s exceptions to this, but that’s a good base-line if you’re trying to figure a rough equivalent of what you can afford.
Total debt service on the other hand includes not only principal interest, taxes and heat, but also any other debt payments or obligations. Now not everything is included in there, and we’ll get to that later, but all debt payments. A good rule of thumb is that TDS should not exceed 42%.
Exceptions up to 44% and beyond are available, depending on someone’s credit score and the particular program that we’re using and applying for. Of course the amount of down payment you have also plays into this, so it’s important to know exactly what rule you’re working at before you go in and apply for something.
So let’s go through GDS, we’ll actually look at how to calculate it. This is a scenario, the common scenario that you see. Someone has an e-mortgage payment that’ll work out to $2,500 a month, and that couple makes $120, 000 a year, combined, both of their jobs, so $10,000 a month. Property taxes are $3, 600 per year, that works out to $300 per month, and heat is $100 at most lenders.
There’s a few that’ll use $85, some of that will use less, that’s conned over. It’s not a big difference, $100 should be used for roundness. Strata fees on the townhouse they’re buying are $330 per month. Now currently, banks only use 50% of the strata fees to count towards GDS and TDS, you have to remember that when you’re working through it. If it is a strata property, meaning an apartment, townhouse, condo, something like that, and there are fees, then only 50% of those are used.
So here’s the calculation. You make $2,500 payment, plus $300 taxes, plus $100 heat and $165 strata fees equals $3,065. $3,065 divided by the $10,000 monthly income, as expressed as a percentage, is 30.65% gross debt service, or GDS, which is within my 35% guideline I gave you. So based on GDS, yes this would be approved.
TDS is a little bit different, similar but different. Same scenario, same payments and all that. The only difference is that last line there, since the client has a $300 per month car payment, and those $8,000 in credit card debt. So here’s the calculation, and I want to note here, for credit cards, most banks use 3% of the amount owing to determine what we’re payment will be. So in this case, $8,000, 3%, $240 will count towards TDS per month. You notice I like to convert everything to monthly numbers, because that tends to be how most people run their budgets, so it’s how I do that.
$2,500 mortgage payment, plus $300 taxes, $100 heat, $165 strata fees, plus the $300 car payment and $240 equals $3,605 per month counted towards their $10,000 income. $3,605 divided by $10, 000 equals 36.05% TDS, total debt service. Again, it’s within my range of 42% that I gave you. So the two ratios to keep in mind are GDS and TDS, 35, 42 respectively. There are exceptions, but for now those are important.
A couple of notes on TDS. People often say to me, “Well wait, if I’ve got monthly bills, what about my cable bill and my cell phone bill?” No. Cable bills, cell phone bills, telephone or Internet bill are not included. Other things not included in monthly RSP contributions, but the loans are; car insurance, house insurance, repairs and maintenance to property and income taxes.
Now you may say, “Well wait, a lot of those are really important expenses, things that I have to pay for” but that’s why we only use 42% or 44% of the TDS calculations. The other 56% to 58% are for those other expenses that everybody else pays. Some things that must be included in TDS and that often people wish were not: child support payments, alimony or spousal support payments, any other loan, credit card, line of credit or monthly debt obligation, car lease payments. If you’re making another year on account, then a year of payment may count towards TDS.
Now it’s a lot of numbers. If you have any questions, feel free to give me a call. I’m happy to run through your situation for free. Everybody’s is different, and it takes some experience to know what numbers actually have to be included, what are not included. So again, for The Mortgage Center, I’m Rowan Smith.
It’s Rowan Smith from the Mortgage Centre. I want to address a very common myth that I hear about, that clients will come to me and say, “Well, I’m a first-time home-buyer, so don’t I get a better rate on my mortgage?”
The answer is absolutely not. Everybody is going to get the same rate based on their credit score and their income and whatnot. Where you get the benefits as a first-time home-buyer is being A, being able to take money out of your RRSP, tax-free, up to $25,000 per person on your first purchase of your home.
And you’re allowed to avoid the Property Transfer Tax, up to a purchase price of 425. Anything over 425 but up to 450, there’s a sliding scale. If you’re buying something over $450,000, it doesn’t matter if you’re a first-time home-buyer or not, you’re going to pay the full Transfer Tax.
The government, I guess, looks at it and says if you can afford a home that that’s expensive, that you shouldn’t be getting the tax break to being with.
So again, just as a recap, RRSPs can be used tax-free for your down payment, and Property Transfer Tax. Those are the only benefits, the only things you get to avoid as part of being a first-time home-buyer. There is no special incentive on rate, I’m sorry. For the Mortgage Centre, I’m Rowan Smith.
Hi everybody. It’s Rowan Smith at the Mortgage Centre. What I wanted to address today is one of the more common confused elements with down payment. Down payment is something that’s very important with your mortgage, but proving not only that you have the money but where the money came from is also very important.
Let me provide you an example. When you go to put, say, 20 percent down on a $500,000 place, that’s $100,000. The bank is going to ask you for either 90 days of bank statements showing that money in your account, or if it’s coming from family — that they’re giving it to you — then, they can get a gift letter.
Where people get confused is they always say, “Well, maybe I’m not really going to get the money from my savings. I might be getting $20,000 from a friend and $25,000 from my brother. And oh, I’ll pay them back later, but for now they’re going to give it to me.”
That’s not really the way that it’s allowed to work. Banks want to know that the down payment does not create any outside interests in the property. When you get money from a friend or get money from a relative, if they’re loaning it to you, frankly you should have a payment on that. Even though most times you don’t, the bank will look at it as though you would.
And secondly, does that other person have an interest in your property? So while it may seem very clear that they’re not on the title, and thus, they don’t, one can argue if they’ve given you the down payment, the fact of the matter is banks don’t want to get involved in that discussion. They don’t want to be pulled into something with multiple parties and competing interests in their security, which is the home.
So you can be expected to have to provide 90 days of bank statements showing the down payment being in your name. Now if it’s not in your name, we have to have a very good story of why. It can be money that’s accumulated within those 90 days. Perhaps you’ve had a large deal close in whatever your business is and you get a large check. That’s all very legitimate.
Then, you should be able to provide invoices or contracts or something to substantiate that the money is, in fact, yours and is not being borrowed or gotten from other sources of debt — like family that are slipping you some money in the time being until you sell the property in a few years. If you have any questions with down payment because perhaps you’re getting a hard time at your bank, give me a call. It’s Rowan Smith from the Mortgage Centre.
Hi everyone, it’s Rowan Smith with the Mortgage Centre. I want to address one of the more common misunderstood elements of mortgage financing, and that’s debt servicing. And what percentage of your income is allowed to go towards mortgage payments, principal, interest, taxes, heat, or other debt payments. There’s two main ratios that we use in the mortgage industry gross debt service ratio, and the total debt service ratio. The gross debt service ratio looks at your gross income and says what percentage of your gross income is being used by your mortgage payments, your principal and interest, taxes, and heat.
Now, the old rules used to be 32, but now there’s ways that we can get as high as 44 percent of your income gross income before taxes is allowed to be used towards debt servicing. Now you have to qualify for that with a very clean credit rating. If your credit has some problems on it, you might only be allowed to use 35 percent of your gross income.
That’s where someone like me comes in who can look at your situation, and know the appropriate number, the appropriate amount of money that you’re allowed to have to qualify for mortgage payments each month. So that’s the first main ratio, gross debt servicing. And that’s looking at, again, principal, interest, taxes and heat.
You’ll notice I made no other mention of credit cards. Well, that’s where the total debt service ratio, or TDS, comes in. Total debt service looks at what percentage of your income is being used for all debts, mortgage, principal, interest, taxes, heat, and car lease, car loan, alimony support payments, any ongoing obligation that a person has, credit cards, lines of credit, that type of thing.
So the general rule there is no more than 44 percent. And you may say, “But Rowan, you’ve said 44 percent was the maximum that could be used for mortgage.” Well, typically the ratios that we use are 35 percent of your income towards housing so principal, interest, taxes and heat.
And 44 percent on the other side as the upward threshold for all of that, plus your other debts. Now, if you’re at 44 percent debt servicing chances are you’re eating a lot of macaroni, and not able to afford a lot of lifestyle that you would otherwise like.
But nonetheless, it’s important just to look at what income number are they’re using 44 percent of what number? Well, that’s typically 44 percent of your gross before tax earnings from all sources. So if you have two part time jobs, well then yes, you can use a total amount of that particular sum of all income.
So if you have somebody that’s being told that they can’t qualify because they’re using too high of a ratio their debt servicing ratios are out of line perhaps I can take a look at it and see if there’s another lender who has more relaxed guidelines, or maybe their bank is being particularly conservative because of their credit score.
Any of these ratios I’ve discussed in this are entirely dependent on your credit score, and how clean it is. That will enable you to stretch, in the bank’s eyes, to use more money for housing expenses and other debt payments. For the Mortgage Centre, I’m Rowan Smith.
Transcript of Video Blog:
Hi everyone. It’s Rowan Smith at the Mortgage Center. I want to address one of the most common myths that I receive questions about. That’s when a client goes into their bank and is told that they are going to be given 2.2 on a five year mortgage. So 2.2 would be the interest rate. The client comes to me, “What can you do on a five year fixed interest rate?” I say, “3.59 or 3.69.” They go, “Wow, well my bank is offering 2.2.”
When I hear that – 2.2 and 3.89 or 3.69 – that’s a massive difference. So why is it that your bank is offering that? Well first off, they are not offering a product that’s fixed for five years. So if you are looking at all the five year fixed rates and you’re seeing a massive difference between what is being offered, make sure you read the fine print to look and see whether or not you are in fact getting a variable mortgage.
I was walking past the Bank of Montreal kiosk that was in a Safeway a little while ago. It said, “Five year mortgage – 2.35″. Now that’s great for inciting a lot of interest in the mortgage and the rate because it sounds so low. Other people are sitting there thinking and looking at that going, “Well, I’m paying 5%.”, or, “I’m paying 4%.” 2.35 sounds great.
You get in there and sure enough you are paying 2.35. You sign it up and then the government announces that the prime rate is going up, and up goes your rate. Now, has the bank been dishonest? Probably. I would argue that that’s a dishonest way of marketing a variable rate mortgage. People should be informed clearly on that advertisement that 2.35 is not the rate that they are going to be getting on an ongoing basis, but rather the rate that they are going to be getting right now.
So when you are getting a quote from your institution, make sure to ask, “Is that a variable or a fixed rate?”, because I get a lot of questions from people who are coming back to me convinced that they have been told it is a fixed rate, only to find out later on, when it is far too late, that in fact it is variable.
Hey everyone! Rowan Smith at the Mortgage Centre. This week we’re doing Myth busting No. 3. This week’s myth is the old: “My bank did a former grow op property for me before so they will again.” That’s not necessarily the case. The industry hasn’t had this problem for that many years, at least not that they’ve been aware of. Properties now being branded as a former grow op in the property condition disclosure statement or in some places even on title has caused lenders to re think how their lending policies are when it comes to former grow ops. They don’t even say why, but what’s changed?
Well, they’re starting to find that some former grow ops have chemical issues with the use of fertilizers and accelerants and whatnot not all of them but some of them and lenders get worried that those chemicals may have leached into the actual property, could damage the actual property. There could have been mold and moisture that damaged the structure.
Well, don’t forget that the property is the bank’s security. Ultimately, that’s all that they have to rely on at the end of the day if there’s a foreclosure. So they want to make darned certain that those properties they’re lending their money on are in fact solid, there’s nothing wrong with them.
Former grow ops haven’t been around, at least in a documented sense, for a long enough period of time for banks to know whether or not they’re actually presenting a risk. So what we saw a few years ago was we could get former grow ops done at five or six banks and it slowly dwindled. Every year we lose one. We’re down now to just a couple of institutions who will consider it and there are pretty onerous paperwork requirements.
Environmental, air quality samples to make sure that there’s no mold or other chemicals in the air. Some of them will want even a “stage two” which could involve taking samples of drywall or this type of thing. Well, certainly they’re going to want to see that the applicant is very solid, their income and credit is very solid as a minimum, before they’re going to lend on a property which might not be quite as solid.
So, you think your bank did it before, I counsel you to check again before you go writing any such check free offers. If you know anybody in this situation who’s written an offer on a former marijuana grow op and would like some advice, get them to call me. I’m Rowan Smith at the Mortgage Centre.
Hi everybody! It’s Rowan Smith with the Mortgage Centre. We’re doing Myth busting #2 here and another one I want to address is the myth that if you have 35% down you don’t even need a job. That is patently incorrect!
There was a time when 35% down gave you a lot more leeway than it does and to a certain extent that’s come back. If you’re a self employed individual you don’t necessarily have to prove how much money your company makes but you do have to prove you have a job, that you have a capacity to make a payment. A mortgage is a 25-year, in some cases a 35-year commitment so, for you, having a four-month contract doesn’t really document that you have the capacity to pay in the long term.
Banks are interested in the long haul. Even with 35% down nowadays you would be expected to provide some form of income confirmation. That doesn’t mean that your tax return has to say a specific amount of money, it simply means you have to: A, have filed your taxes and your taxes are up to date; B, that you proved that you can in fact make these payments. Reasonable proof, not just some estimate of what your future earnings and income could be.
For a company that might mean maybe the last couple of year’s financial statements, so that they can look at your gross income and then another more important factor is: “What is your business?” If your business is something like a small-time cleaning company where you’re doing residential cleaning there’s a very good chance you’re making some cash in there and while the banks don’t recognize cash, they’re aware that this goes on in the industry.
These programs are equity programs based on the equity that someone is putting down, not based on the documented income. So, with 35% down you still do need a job or at least — at the very least — you have to have a way to make those payments.