If you are a typical borrower, your debt ratios largely determine if you are approved for a mortgage. For applicants who push the limits of qualification, those approvals have been tougher to come by. That is a direct result of last years mortgage rule tightening, which imposed stricter debt ratio calculations. By year end, those calculations will get even more conservative.
For variable income: Lenders must use “an amount not exceeding the average income of the past 2 years.” Variable refers to things like bouses, tips, seasonal employment and investment income.
For rental income: If a borrower owns other non owner occupied property, the principal, interest, property taxes and heat (P.I.T.H) on these properties must be either:
*deducted from the gross rent revenue to establish net rental income: or
*included in other debt obligations when the Total Debt Service (TDS) ratio is being calculated.
For guarantor income: A guarantor’s income must not be used in GDS?TDS ratios “unless they occupy the home and is the spouse or common-law partner of the borrower.
Unsecured credit lines & credit card: For these debts, No less than 3% of the outstanding balance must be included in the monthly debt payments. Interest only payments are no longer considered on credit lines.
Secured lines of credit: Lenders must factor in “the equivalent” of a payment that is based on the outstanding balanced amortized over 25 years. That payment must use either the contract rate of the LOC or the 5 year Benchmark.
Heating costs: “Actual heating costs records” of a property must be obtained. When no such history is available, the heat expense used in debt ratio calculations must be reasonable. Some lenders have already moved to using this heating cost formula, (square footage X $0.75)/ 12 months
What all this means for borrowers pushing the envelope is it will be tougher to qualify and you will be able to purchase less of a home. For those with great credit, income etc., having those secured lines of credit even at zero balance now have to be factored into your ratio’s.