Qualifying at the Bank
- Gross Debt Service Ratio (GDS): Typically a bank doesn’t want you to spend more than 32% of your verifiable income on servicing the mortgage payment, taxes and condo fees (if applicable) on the property that you are buying.
- The average bank will look at the two-year average of line 150 on your tax return to define the verifiable income
- Total Debt Service Ratio (TDS): “T” stands for total debt. GDS only takes into consideration the housing expenses associated with the property you are buying. The TDS adds all your other debts, including those associated with other rental properties. Banks do not want to see you spend more than 40% of your verifiable income on your total debts.
- Debt Service Limit (DSL):
- (Verifiable income x 40%) / 12 = $________ monthly DSL
- Every bank will have their own system of how they treat rental income:
- Rental Offset Policy: takes into consideration a percentage of the total amount of rental income and then subtracts the expense or a portion thereof. If a bank applies a 70% rental offset, it means they will take the total rent, multiply it by 70% and then subtract the total amount of mortgage payments only. They are not factoring the other 30% because it is being used to factor in miscellaneous expenses such as condo fees, property taxes, maintenance, management and vacancy ratios. In most cases, any surplus is added to income to help with servicing the total debt, whereas any shortfall is added to your personal debt as if it were a credit card payment.
- Rental Add Back Policy: significantly less appealing to the real estate investor. It “adds” 100% of the rental income to your personal income which is then subject to the 40% DSL rule
- If you have two people on title, all the information for both of them is added. Their incomes are combined, and so are their debts
- Multifamily properties are considered “commercial”
mortgages and there is a whole new set of rules. Most lenders will treat a
property with 6 units or more as commercial.
- In residential mortgages the most important component of the application is you – the borrower. With commercial real estate, the roles are reversed and the property is the main focus
Managing Your Cap Space
- Cap space is the lending limit that a particular bank will place on an individual borrower
- Some banks will only finance up to a certain amount of doors with you.
- Others will have an overall dollar limit
- Some are more “investor-friendly”.
- Some do not work with mortgage brokers
- Most investors make a huge mistake. They think that because they have a wonderful relationship with their local banker, they should start out by getting their first investment property mortgage with that bank. You may want to save them for when you really need a favour.
- Properties 1 and 2 are significantly easier to finance than properties 3 to 20.
- Do not place your principal residence with any “investor-friendly” bank, but rather with a lender that doesn’t lend on revenue property
- Although every bank will have a cap space or limit as to how many mortgages they will grant each individual investor, those rules are typically not written in stone and can vary depending on market conditions