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Archive for the ‘Income Qualifying’ Category

MYTHBUSTING: “I have 35% down payment so I don’t have to prove income…”

Thursday, January 8th, 2009

There was a time, not so long ago, when a buyer with 35% down payment basically was guaranteed approval. In fact, there was a time when I heard brokers remark amongst themselves that with 35% down payment, the applicant didn’t even need a job! The scary thing was, they were right!

Oftentimes, mortgages (whether a purchase, renewal, or refinance) with 35% down were referred to as “equity mortgages” as the client had so much equity in the property that the lender didn’t spend as much time on other important elements of lending due diligence.

However, times have changed. Having 35% down indicates a very strong applicant, but lenders have learned (after watching the US meltdown and going through their own foreclosures) that just having 35% down doesn’t guarantee that the mortgage is “safe.”

The fundamental problem with the exotic and dangerous “sub prime” mortgages in the US was the lack of lender due diligence with regards to PROVING INCOME. Lenders often took “stated income” (just a verbal or written statement from the client) or “lite docs” (less than normal income verification) and funded mortgages in circumstances where they shouldn’t have. This type of underwriting slowly made its way into Canada, but unlike the US, lenders in Canada insisted on far larger (35%) down payments before they would waive income. As the real estate market continued moving higher, the percentage of down payment required dropped further – especially for self employed people who, due to write offs, have a notoriously hard time proving income – and further and further until, at it’s peak, a person with 5% down could buy a home even without proving their income!

Times have changed. As market prices have plummetted all over the planet, and particularly in the higher priced markets, lender guidelines have tightened. The single most important change has been lender demands to PROVE INCOME. I have written several other articles on this topic, and in every one I have said that lenders are now asking for more and clearer proof of income.

Consider the following: a building contractor that is paid 50% in cash (under the table) and 50% via cheque (above board) will also “write down” their income as much as possible using all available expenses as tax deductions. Subsequently, after making $80,000 a year (before tax – above board) and $25,000 a year (after tax) for the past 5 years, they decide they would like to buy a home. What number do most lenders use to qualify them for the purchase? The $25,000 taxable income even though the guy received another $80,000 of cash under the table.

If an applicant has very good credit, and can prove they have a business, they MAY be able to avoid fully proving all their income. However, if the applicant works for someone else and is paid hourly, salary, commissions, or any other payment from that is NOT from self employment, then they WILL HAVE TO PROVE THEY EARN SUFFICIENT INCOME TO SERVICE THE DEBT.

Just having a large down payment is no longer a guarantee of approval. Was it a virtual guarantee before? Yes, but markets, just like seasons, change in predictable cycles, and the mortgage market has changed.

Lastly, just having a down payment that is large ignores the fundamental fact about the mortgage: the property! If the property is a recreational property, or located in a remote area, or extra large acreage, or in the Agricultural Land Reserve, or any other number of factors, the lender may want even MORE down payment, or not do the deal at all! The property is a fundamental factor in any mortgage (it is the security for the lender) and just having a large down payment isn’t enough.

Can I get you approved with 35% down? It is very very likely, but it isn’t a guarantee, and I’m tired of hearing person after person saying, “I know a guy that can get ANY mortgage approved if you have 35% down”,” because that fact simply isn’t true any longer.