If you follow my Top 8 Tips for getting your investment property mortgage approval, you’ll be well prepared for the process and maximize your chances of success. But before we start on the tips let’s review current context for obtaining a mortgage for an investment property.
With the continual tightening of mortgage lending policies by the banks, being prepared can make the difference between getting a mortgage for your investment property or not. It is wise to understand what the banks and major lenders want in a mortgage applicant and what information they’ll require in order to consider your application.
In Canada, the banks have traditionally been conservative in their lending policies and have approved applicants that have a good net worth and are able to demonstrate a consistent ability to cover and service their debt, including mortgage debt. The banks do not want to lend to someone who is overextended or who will be at the limit of their capacity to service the new mortgage. Let’s face facts − the banks are looking after their own bottom line by ensuring that the mortgagees can service the debt on the mortgages the banks supply.
The tightening of Canadian lending policies in recent years is due to the overall fallout from the combination of 1) the financial crisis in 2008: the issues related to mortgage underwriting in the U.S. which also affected financial markets around the globe, 2) concerns over growing Canadian family debt, and 3) Canadian banks having to comply with the Basel III requirements – international standards that came into effect in 2012. These standards require banks to have enough assets available to cover their liabilities, even for Canadian banks this may not have been the case prior to 2012.
Overall, getting approval for mortgages for investment properties has become more difficult due to stricter Canadian Housing and Mortgage Corporation regulations (CHMC), new international banking standards and the Canadian governments concerns re the ratio of household debt to household income. Currently this debt ratio is about 151% for Canadians and about 136% for Americans. However Canadians service their debt well and tend to focus on paying it down quickly. According to a recent CIBC poll, Canadians continue to identify “paying down debt” as a top financial priority for most households.
More people are investing in real estate, and coincidentally mortgage lenders have become more stringent on lending for investment properties. Some major institutions limit investors to one investment property, but most will allow you to have mortgages on up to six investment properties. There are still a few lenders who don’t yet have a set limit on the number of investment properties one can own.
So now that we know the lay of the land with regards to obtaining mortgage financing for investment properties, what can we do to improve our odds for obtaining the best possible mortgage financing for our investment properties.
Remember even though it is not stated explicitly banks will assume that you’re a risk as a creditor until it is proven that that you aren’t – this is the fundamental reason you need to have your financial house in order before you begin the process of a seeking a mortgage for an investment property.
1. Have an investment property plan
- Be clear about what you’re trying to accomplish with your real estate investment portfolio.
- Know what you can afford versus what you’d like to have.
- Remember this is not your personal home, so your approach to this property purchase is as an investment vs. a place you plan to live in.
- Be aware that the banks will likely ask you why you’re buying a particular property and you should have a clear, concise answer.
2. Get and stay organized
- Create a physical binder or electronic folder with the documents and information you’ll require for your mortgage application.
- Update it every 2 to 3 months so that it’s ready for use.
- Tax returns for all applicants (most recent and at least 2 previous years)
- Notice of tax assessment from previous two years
- Recent bank statements
- Liquid and non-liquid assets including
- Investment statements
- Tax differed or sheltered accounts such as RRSPs, RESPs, TSFAs,
- Non-sheltered investment accounts
- Statements of current assets that have significant value
- Insurance policies
- Current statements/information re your liabilities:
- Credit card balances
- Spousal and/or child support
- Line of credit balance(s)
- Car loans
- Mortgage statements for existing properties
- Property Tax assessments for existing properties
- Property tax statements with payments for existing properties
- Lease agreements for existing properties
- Documents for all co-owned assets
3. Understand how lenders view an employee vs. being self-employed
- As an employee you’ll be required to provide a letter of employment on your employer’s letterhead as proof of your employment, your position, length of employment, salary, whether you’re a full-time or part-time employee, etc. In addition you’ll be asked for a copy of your latest pay advice/pay stub. It’s best if you have been with your current employer for at least a year.
- As someone who is self-employed you’ll need to provide complete tax returns (both personal and for your business if filed separately) for the past three years. Providing evidence of stable income is key when applying for a mortgage. You will also need to provide your business number and, if your business is incorporated – your articles of incorporation and certificate of incorporation. The bank also may request a number of other corporate documents.
4. Put your best foot forward
- Have a clear written plan with projected outcomes for your investment property even if it’s simply a single page, as the lender may request this of you. Having a clear, well-thought out plan for your investment property will not only help you but show the lender that you are serious, professional and are treating this endeavour like a business. This may even help in negotiating with the lender and obtaining the best rates and terms available.
- Have all recent and, if applicable, outstanding tax returns completed and filed; ensure any outstanding taxes are paid. It is almost impossible these days to get financing for a mortgage without completing this step.
- Review your credit score and check it regularly; you need to have a good/high score to get mortgage approval as an investor.
- Equifax and TransUnion are two major credit reporting companies that many lenders use most often to obtain credit scores. You can utilize them to obtain a free online credit check once a year. If you alternate the two organizations every six months – you can access your credit score for free twice a year. Alternatively, you can pay these organizations, at any time, and they’ll provide an up-to-date credit score.
- Pay down credit card and consumer debt as much as possible. Paying the minimum balance is not going to help you.
- Be aware that even “zero balance” lines of credit can impact your credit rating and the financial profile you’re providing to the banks. For example if you have a single or multiple lines of credit, even though you may not have borrowed from the lines of credit, it/they still represent potential debt. Depending on the situation, the bank may even request that you close your line of credit(s) as a condition in order to get the mortgage.
5. Keep your financial situation stable
- Don’t shift large sums of funds around or make large changes to your financial situation while you’re preparing to apply for a mortgage for investment purposes, as well as while you’re in the process of applying.
- Your financial profile has to match the financial information you’ve provided to the bank. Quite simply, you must be prepared to disclose all of your liabilities as well as your assets. If there is an unexpected change in your financial profile while you’re seeking mortgage approval you should disclose it to your lender. [Rule of Thumb: if it is in your credit bureau, then disclose it on your financial application.]
- Don’t change jobs – the banks want to see evidence of stable employment or regular income. If for some reason you do change jobs while seeking mortgage approval, the banks will likely defer providing a mortgage until you have been with your new employer for a period of time that could even be up to a year, unless you have considerable assets or other areas of your finances are very strong and/or you have a co-signer.
- Be aware that any funds you’re using for a down payment for an investment property will have to be verified by the bank and there should be a solid paper trail for the previous 90 days with respect to the source of the funds.
- If the funds for your down payment are coming from a secured line of credit be prepared to provide the latest monthly statement.
- Receiving large financial gifts from people and using it towards a down payment is more challenging these days and will likely be scrutinized by lenders because of requirements under Canadian money laundering and anti-terrorism legislation. If this is a situation that may be apply to you, it’s best to have those funds transferred well in advance of applying for a mortgage and it is wise to have some sort of documentation to support that funds are a gift. The lenders may even ask for proof from the person who gave you the money.
6. Use an experienced mortgage broker
- Unless you have a great working relationship with your current banker, and are confident and comfortable with the mortgage rate and terms they’ll provide you, from my 25 years of experience, it’s wise to use a mortgage broker.
- A mortgage broker works for you. He/she is a trained professional and will work to find the best mortgage options for you from amongst a variety of lenders. All the major banks now have mortgage specialists, but you have to remember that they are employed by a particular bank and their job is to sell you one of their institution’s mortgage products, not to shop around amongst the various lenders.
- There are a wide range of rates, terms and conditions available and a good, experienced mortgage broker will help you identify what your requirements are for a mortgage and then will identify your best options.
- Every time you ask for a mortgage from a bank they’ll make an inquiry into your credit rating by pulling a copy of your credit bureau; too many inquiries will raise flags for individual banks as this may be a sign of someone seeking credit, not receiving it and then applying elsewhere. Banks typically do not necessarily want to lend to someone who has not met the criteria for another bank.
- Utilizing a mortgage broker reduces the chance of you appearing to be a credit seeker as they pull your credit bureau once and then provide it to various lenders as they work to identify mortgage options for your specific needs.
- A mortgage pre-qualification is an initial step in the mortgage process that may be very useful as it provides an estimate of how much you can afford to spend on your investment property. When you provide a bank or mortgage broker with your overall financial picture (including current income, assets and debts) they will evaluate this information and provide you with an estimate of the amount of mortgage for which you would qualify. Many banks and lenders also have web-based estimating tools that will give you an estimate of the amount of mortgage for which you might be eligible.
- Pre-approval of a mortgage is much more valuable because this means the lender has actually checked your credit and verified your documentation to approve a specific loan amount (typically valid for a set period of time such as 90 days). However, even with mortgage pre-approval the final loan approval doesn’t occur until you’ve identified a specific property, an appraisal to confirm that property’s value is completed and the loan is applied to that particular property.
- It can be a bit nerve-wracking when you’re applying for a mortgage. But you’ll reduce your stress and be able to present the banks with a strong financial profile if you follow my seven tips for getting mortgage approval including:
- having your documents and financial information together, and
- having a clear understanding that the banks are looking for proof that you:
- are a good credit risk,
- are capable of and prepared to service your debt, and that you have a reliable source of income.
In closing I would like to acknowledge and thank my good friend Jeff Cassidy, a very experienced mortgage broker with Port City Financial Inc., for assisting me with this article.