Deferrals Appearing on Credit Reports: Credit bureaus are alerting lenders when you’ve requested a payment deferral. If you’ve deferred your mortgage, Equifax says you should see one or both of these statements in the comments section of your credit report:
Deferred Payment Affected by Natural or Declared Disaster
Mortgage deferrals aren’t supposed to hurt people’s credit scores but when a mainstream lender sees you’ve had a deferral, it’s nonetheless a red flag. The lender may:
Scrutinize your income/employment more closely
Ask for more documentation
Decline you if you have borderline qualifications, particularly if you’re employed in a higher-risk industry.
Be prepared:
Always disclose you’ve had a deferral when applying. Lenders don’t like surprises
Have a good explanation ready for why you needed a deferral and why your job is now stable long term
Make sure you can prove your income and employment are back to normal
If you’re salaried, you’ll need a pay stub from the last few weeks
If you’re self-employed, prove with receipts or contracts that you’re generating business again, and back it up with bank statements
If you’re commissioned, a current commission statement and bank statements help
Don’t bother applying with a mainstream lender unless you’ve resumed making your mortgage payments.
How COVID Changed Homebuying: Rates.ca covers new stats on this from OREA.
Stress Test End-Around: Can’t pass your bank’s mortgage stress test? There are multiple institutional lenders now advertising “less stress” mortgages where you don’t have to. You only have to prove you can afford a payment based on your actual mortgage rate. These lenders can offer this flexibility because they’re not federally regulated. Rates for such products start at roughly 3.49%, more than a point above the best available uninsured rates. That surcharge buys you more purchasing power. A household making $80,000 a year can get approved for roughly 15% more home (about $73,000 more buying power). One downside is the interest cost. A five-year rate of 3.49% vs. 2.49% costs you $18,729 more interest over 60 months on the average-priced ($488,203) home, assuming a 30-year amortization. That may sound like too high a price to pay until you factor in home price appreciation. If your home appreciates at the current 1.8% rate of annual core inflation, that’s a $45,549 gain over five years on the average priced home, two-and-a-half times the extra interest expense. To qualify for one of these “less stress” mortgages, you’ll need strong credit, fully provable income and 20%+ equity.
Quotable: “Recent Bank of Canada analysis suggested expiry of deferrals and income-support programs later this year—when the labour market still hasn’t fully healed from the COVID-19 shock—will push mortgage arrears higher in early 2021.”—RBC Economics
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Could you explain more how these stress test exceptions are possible? I thought OSFI B-20 applies to everyone regardless of insured/uninsured. How are the lenders able to bypass?
Hi LS, The lenders offering these uninsured products are not directly regulated by OSFI, and these deals are only a small part of their business. Hence, they’re free to qualify borrowers at the contract rate if they can find unregulated capital to fund them.
In a popular housing market that is under supplied, that 1.8% could easily be more than double, 3.6%. Someone waiting 5 years to get their debt ratios below OSFI limits could be leaving $100K of price appreciation on the table.
Hey Broker, We purposely tried to be conservative on that appreciation number given the price risk in the market. It could obviously average less than 1.8% over five years as well.
It’s possible because they aren’t regulated and don’t take deposits. What I don’t fully understand is how these less stressed loans are funded. They aren’t securitized to my knowledge. Are institutional investors buying them and keeping on balance sheet? How much actual funding capacity is there in this crisis environment? Spy can you fill in the gaps?
Hi David, I’m aware of one lender (a monoline) that qualifies borrowers at the contract rate and sells those mortgages to an investor. Not sure what the investor does with them thereafter. Another credit union I know of just keeps them on its balance sheet. There’s plenty of supply for this type of financing but not as much demand as one may think. For one thing, most consumers don’t know about and/or understand these products. For another, the percentage of people with non-OSFI compliant debt ratios, who are willing and able to buy a home, is relatively small to begin with.
Real estate in some Canadian markets has averaged over 5% a year, for twenty years. That probably can’t be sustained but I think we have to assume it will at least keep pace with inflation over 5-10 years.
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Could you explain more how these stress test exceptions are possible? I thought OSFI B-20 applies to everyone regardless of insured/uninsured. How are the lenders able to bypass?
Hi LS, The lenders offering these uninsured products are not directly regulated by OSFI, and these deals are only a small part of their business. Hence, they’re free to qualify borrowers at the contract rate if they can find unregulated capital to fund them.
In a popular housing market that is under supplied, that 1.8% could easily be more than double, 3.6%. Someone waiting 5 years to get their debt ratios below OSFI limits could be leaving $100K of price appreciation on the table.
Hey Broker, We purposely tried to be conservative on that appreciation number given the price risk in the market. It could obviously average less than 1.8% over five years as well.
It’s possible because they aren’t regulated and don’t take deposits. What I don’t fully understand is how these less stressed loans are funded. They aren’t securitized to my knowledge. Are institutional investors buying them and keeping on balance sheet? How much actual funding capacity is there in this crisis environment? Spy can you fill in the gaps?
Hi David, I’m aware of one lender (a monoline) that qualifies borrowers at the contract rate and sells those mortgages to an investor. Not sure what the investor does with them thereafter. Another credit union I know of just keeps them on its balance sheet. There’s plenty of supply for this type of financing but not as much demand as one may think. For one thing, most consumers don’t know about and/or understand these products. For another, the percentage of people with non-OSFI compliant debt ratios, who are willing and able to buy a home, is relatively small to begin with.
please register me for your news letter
thanks
Can you personally guarantee that the subject property will appreciate as stated ?
Of course you cannot.
Fraud.
Real estate in some Canadian markets has averaged over 5% a year, for twenty years. That probably can’t be sustained but I think we have to assume it will at least keep pace with inflation over 5-10 years.