Rental Income used in qualification:
The Powerful New T1 method.
The Powerful New T1 method.
Story
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After the dust settled.
Using rental income in qualification has changed significantlyby Michael McIvor
August 1st, 2010
It's not all 50% add back across the board as we first thought.
We were all anxious in anticipation when CMHC announced usage of rental income in qualification changes April 9th,2010. How would the new CMHC policy changes with respect to rental income usage in qualification affect our ability to qualify an owner occupied or a rental property purchase?
To illustrate the differences I have some good ratios you can use for estimation purposes. Let's take $1000 dollars in rental income generated on a subject property. Using the old rules we could take $800 dollars of that and subtract it directly from the mortgage payment(s) that were to be debt serviced. Using the qualifying benchmark rate today of 5.79%, this would mean it would have increased our purchase price by $140k. Yes, thats right, $140k.
CMHC's new policy says we can only use 50% of that $1000 and add it back to you personal income in debt servicing. This means if you are making $50k / year in employment income, you are looked at as if you made $56k. The extra $6000 is $500 x 12 over the course of the year added to your personal income.
Using the new CMHC rental income policy, every $1000 in rental income will increase your purchase price by $30k on a subject property.
It does get much better when dealing with portfolio rental properties though. Portfolio properties are additional properties you own, generate rental income on, and are not being financed in the current transaction. We still need to account for them in the qualification process, but how do we use the rental income?
If rental income is generated from an owner occupied with a rental component, we are still using the 50% add back to income rule. Pure rental(s) income generated from a property though we can use the NET RENTAL INCOME generated. This means the gross rents -less Principle, Interest, and Property Tax -less expenses. Expenses are considered to be 5% maintenance, 5% vacancy, 5% management fees, 5% insurance.
Sophisticated investors know that cash flow is extremely important in building a portfolio of properties. Now it is more important than ever. The additional cash flow you can use in qualification if the property pays for itself. 100% of the cash flow gets added to your personal income. Preferred documentation is a 2 year history on the T1 generals with statement of rental activity. It is in fact the documentation that will be expected if you have owned the property greater than 2 years. Owning a property under 2 years you will be able to use lease agreements, mortgage statements, and property tax statements to confirm NET RENTAL INCOME.
Here is a brief video explaining how the T1 system works in qualification and why it is so powerful:
These are the new insurer policies for useage of rental income in qualification. All insurers now support the T1 method. If a lender has to send your mortgage application to CMHC to be insured, this is how rental income in your application will be treated only you will not be able to use rental income from unauthorized dwellings in qualification. There are alternatives for owner occupied with rental component properties such as 100% add back to income; a Genworth and Canada guaranty supported initiative for areas within the lower mainland. Conventional rental transactions are also a whole different ball game as DCR programs still exist and applicants can still use the 3 year discounted fixed rate to qualify for variable rate mortgages at lower Loan To Values.
Canada Guaranty; Canada's third mortgage insurer, has now launched with many lenders and the coming months should be interesting to watch as the insurer product evolves.
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#205 - 20641 Logan Ave.
Langley, BC, V3A 7R3
michael@michaelmcivor.com
P. 778.823.6453
F. 866.407.0237
Mortgage Negotiators
#205 - 20641 Logan Ave.
Langley, BC, V3A 7R3
michael@michaelmcivor.com
P. 778.823.6453
F. 866.407.0237
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