08/02/2013
YOUR SIMPLIFIED GUIDE TO THE UPCOMING NEW MORTGAGE RULES
On June 27th the Canada Mortgage and Housing Corporation (aka CMHC) issued new guidelines for calculating debt ratios and confirming income documents. This was in response to the fact that their most recent mortgage rule tightening didn’t clarify how each key input included in the calculation of debt service ratios would be treated. The new guidelines also offer more details in regards to documentation requirements. These clarifications will become effective on December 31st, 2013 however it’s important to note that lenders are already following the majority of these policies. You can view the new guidelines HERE.
It may all seem a tad bit confusing so we’ve put together a simplified guide to the upcoming rules that should help make things easier to understand.
INCOME
• All borrowers are required to provide the following supporting documentation:
• Income confirmation
• Employment status confirmation
• Proof of income sustainability
VARIABLE INCOME
• Lenders must use an amount that does NOT exceed the borrowers’ average income (which includes variable income) over the past 2 years.
• Variable income refers to things such as payment bonuses, tips, seasonal employment and investment income.
• Simply put, if your TOTAL income (annual income + variable income) fluctuated over the past 2 years, the lender will take the average of those amounts and use that amount for your application.
SELF-EMPLOYED INCOME
This concerns those who do not have traditional documentation to support income verification; borrowers who have recently become self-employed or have recently started operating a new business.
• Borrowers in this category are still expected to provide documentation to support their income. Despite the lack of traditional documentation, the borrower must make a reasonable effort to fairly assess the likelihood of the income.
• Lenders will not rely solely on the borrower’s disclosure so borrowers must be prepared.
RENTAL INCOME
• If a borrower’s gross annual income includes rental income from a non-owner occupied property that is not the subject of the current application, the principal, interest, property taxes and heat (P.I.T.H.) of that property (or multiple properties) must be:
• Deducted from gross rent revenue to establish net rental income; or
• Included in “other debt obligations” when the Total Debt Service (TDS) ratio is being calculated
GUARANTOR INCOME
• A guarantor’s income cannot be used in the application unless the guarantor occupies the home and is the spouse or common-law partner of the borrower.
UNSECURED LINES OF CREDIT & CREDIT CARDS
• No less than 3% of the outstanding balance will be included in the monthly debt payments.
• Interest-only payments will no longer be considered.
• Lenders must assess the borrower’s credit history and borrowing behavior to determine the actual amount or revolving credit that should be accounted for.
SECURED LINES OF CREDIT
• An amount equivalent to a payment based on the outstanding balance amortized over 25 years will be used.
• That payment amount must be calculated using the 5-Year Benchmark rate published by the Bank of Canada
HEATING COSTS
• Lenders must obtain heating cost records for the subject property.
• If no heating cost records are available, the borrower must provide a reasonable estimate to be used in the debt ratios.
• A reasonable estimate would be based on the property size, location and/or type of heating system
