.

Lendor's Guide To Borrower Eligibility

 

Employment Standards

Employment by Others (Salary)
In general, employment and income should be confirmed with a formal letter from the employer stating length and type of employment (ie: as full time, part time, regular, probation, etc), and the amount of salary. Lenders are also responsible for providing additional supporting documentation such as current payroll stubs and applicant's annual tax returns or the tax assessment receipts. To demonstrate the necessary stability of an applicant's employment, borrowers should have been continuously employed by their current employer for a minimum of one full year. Those applicants who may be on probation or work under short-term contracts, are normally not considered salaried employees. Please note: prior employment history should always corroborate an applicant's current employment circumstances.

    

Employed, Irregular Income
For qualifying purposes, fluctuating incomes such as commissioned sales or short-term contracts are usually taken from the borrower's historical income-producing patterns. A minimum basis of three years is considered reasonable to estimate an accurate qualifying income average. Customary documentation might include confirmation of commission agreement or employer contracts, plus the personal tax returns (with annual assessment notices) for the past three years. If a realistic income consistency cannot be confirmed from this sampling, the reporting period may be extended beyond three years.

    

Self-employment Earnings
Self-employed applicants should be able to demonstrate at least three full years of successful operation. This is to be verified through an overall review of financial statements from the business and/or individual income tax returns. When income tax returns are used to verify income, they should also be supported by the official Notice of Assessment from Revenue Canada. The borrower's income alone, or in combination with that of a co-applicant, must also be considered as sufficient to cover the mortgage debt, property expenses and external debt repayment, while leaving sufficient cash flow for typical day-to-day living.

    

Eligible Income

Commuting Distance Concerns
If an applicant's location of their employment is not within a normal commuting distance from the subject residential property, the lender should assess the reasonableness of the mortgage loan, and must substantiate the expected consistency for future income considering the physical distance involved.

    

Overtime/Secondary Employment
Income earned on an overtime bases should be included only if it is clearly demonstrated that such income is considered typical, and the amount of overtime is reasonable and expected to continue. The same holds true for a secondary employment. Expectations should be confirmed from historical documentation (prior tax returns, etc.).

    

Commission Income
Commission income may be included if it can be clearly demonstrated that the level of income shown will be supportable in the future. Generally, this would require a borrower to demonstrate that similar commissions have been earned (and documented) for the past three or more years.

    

Bonus Incomes
Bonuses and/or profit-sharing allowances may be included into income where it is verified at similar levels for the past three or more years, and has the likelihood that these amounts will continue in the future.

    

Tips or Gratuities
Tips and/or gratuities may be included as income provided that this form of income is consistent, and is declared as income through personal tax returns with verification on tax assessment receipts for more than one year.

    

Legal Suite Rental Income
In many cases, up to 50% of the documented rental income (residence legal suite) may be added to an applicant's earned income for qualifying purposes. There must be a reasonable expectation that this rental income will continue.

    

Investment Income
Income from investments in securities, bonds and the like, may be included if it can be demonstrated that similar income amounts have been available for the past three years, and is reasonably expected to continue. Should an investment income be considered as highly speculative, it would not normally be included.

    

Alimony/Child Support
Payments received for alimony and/or child support may be included into income where it is demonstrated over time that such payments have been fully and regularly made and are expected to continue on the same regular basis. Also note: When an applicant is the person obligated to make such alimony and/or support payments, the amount of those required payments should be deducted from that designated income.

    

Social Assistance / Employment Insurance
Payments from social assistance and/or employment insurance payment programs can only be included if those payments are demonstrated to be a normally cyclical income pattern. (Past examples might have included professional fishers in the Maritimes or loggers in BC.) These incomes should be confirmed over the past three or more years, and applicants must show that such income is reasonably expected to continue.

    

Gross Debt Service (GDS) Ratio

GDSR Introduction
The Gross Debt Service (GDS) ratio shows the relationship between an applicant's expected shelter-servicing commitments, and the qualifying income used. These commitments include the mortgage payment, property taxes and heating costs (plus a portion of common/strata fees, if applicable). [NB: Under the National Housing Act's Lender Guidelines for CMHC high-ratio financing (ie: all mortgage loans over 75% loan-to-value), the standard maximum qualifying GDS ratio is considered to be 32%.]

    

Secondary Financing
The repayment of any additional financing for which the property may be presented as security must be included within the GDS ratio.

Strata / Condominium Fees
If the application is for a mortgage loan over legal strata-type or row-housing units, the GDS ratio will generally include an estimated 50% of the subject property's applicable common fees.

    

Total Debt Service (TDS) Ratio

TDSR Introduction
Since mortgage borrowers must also meet financial commitments other than the cost of shelter, their financial capacity for the total repayment obligations are also assessed. This is referred to as a Total Debt Service (TDS) ratio and compares the carrying costs of shelter expenses plus all other existing debt payments in relation to the applicant's income. [NB: Under the National Housing Act's Lender Guidelines for CMHC high-ratio financing (ie: any down payment or equity position less than 25% of property value), the standard maximum qualifying TDS ratio is considered to be 40%.

    

Down Payment Verification
Expectation of Owner Equity
Lenders must ensure that a borrower is fulfilling the minimum down payment requirements from the applicant's own resources, and the lender should further verify this amount will be available at the time of closing. Down payment equity from "own resources" is interpreted to mean from… bona fide savings, an outright gift from immediate relatives, borrowing at arms-length from a third party, equity from the sale of another property, and/or duly contracted applicant labour. In addition to confirming the minimum equity requirements, the lender must also be satisfied that the borrower is able to cover expected closing costs. These may include, but are not limited to, legal fees, deposits, appraisal, any land transfer taxes and registration fees, etc.

    

Applicant's Savings
Lenders should attempt to obtain statements showing accumulation of the savings in an orderly and reasonable manner. Savings should be compared with borrower's income to ensure that they are reasonable. Declarations or affidavits from borrowers stating that the equity is from their own resources are not sufficient by themselves.

    

Sale of Another Property
If down payment equity is to come from the sale of another property, verification of this equity must be obtained. The lender should confirm the previous property's selling value plus the outstanding balance of any existing financing on that property.

    

Sale of Stocks/RRSPs
If the down payment is to come from the sale of stocks or bonds, the lender must verify the fair market value of such assets.

    

Family Gifts
Outright gifts from immediate relatives are normally an acceptable source of down payment. Gifts are to be documented by a formal letter from the donor declaring the amount as a "true gift" and not a loan. Confirmation of resources should be obtained to affirm the gifted asset.

    

Borrowing Against Assets
Applicants may separately borrow funds that can be used for down payment equity. Borrowed owner-equity may come from any “arms-length” source that is not tied to the property purchase or sale transaction. Such sources might include personal loans, lines of credit or credit cards, and/or lender cash-back incentives. However – all payments on such borrowed funds must be included in the applicant’s TDS calculation.

    

Sweat Equity
A lender must be satisfied that the applicant has the necessary skills and time available to perform, or has actually performed the work within an acceptable time frame. When there is a construction agreement with a builder, the sweat equity is to be clearly outlined and provided for in that agreement. Allowance for any form of sweat equity should not exceed 50% of the required minimum down payment.

    

Rent as Equity
Rent will only be accepted towards a down payment if it was acknowledged in a contractual agreement that includes the prepayment of equity on a monthly basis as part of an agreement to purchase. This option must involve only the monthly payment of an amount in excess of the market rent for that property. The original agreement should also contain some provision for a full (or partial) refund of that amount in the event that the prospective purchaser did not exercise this right to buy. The total amount of down payment to be credited to the borrower may not be more than the sum of those monthly payments that exceeded the fair market rental for that property.

    

Closing Costs
As a condition of approval, the lender must also verify that the borrower has additional resources available for the anticipated closing costs (no less than an amount equal to 1.5% of the purchase price).

    

Credit Worthiness

Credit History Report
A report on all borrowers must be obtained from an independent credit-reporting agency, and provided in sufficient detail to adequately confirm: - current address and borrower's identification information; - loan and the loan repayment records; - historical credit repayment records including a listing of recent inquiries. Each report should provide current file information on credit received and current outstanding balances remaining. Recent enquiries in these reports should be investigated to determine if additional credit was granted that may not yet be reflected on that file. If any borrowers have been known to use several names, nicknames, variations in spelling, birth names, or previous spouses' names, credit reports should be obtained on all those variations. Credit reports should always reflect at least three years of history. Where a former bankruptcy record is disclosed, the applicant must have re-establish the necessary credit management and stability of income to qualify for a high-ratio insured loan. Such re-establishment could take upwards of two, three, or more years from the date of discharge. It is also necessary to assess any residual effects that bankruptcy may have on the applicant's future ability to repay.

    

Guarantors

Occasionally, loan applications are received for which the applicant's current financial situation is not considered sufficient to warrant an approval. When these instances exist, a covenantal guarantee may be considered for qualification purposes. In all such cases, a guarantor to the loan is likewise considered an applicant. A complete assessment of the Guarantor's financial capacity is required.

    

Non-Residents of Canada
CMHC Mortgage Insured Loans are only available to permanent residents of Canada.