There is a lot to consider when purchasing a rental property and it's important to have a strategic, well thought out plan in place to make this a positive experience for everyone involved. When you are purchasing a property for rental income, you’ll be required to have at least 20% of the purchase price as a down payment.

Many traditional banks are opposed to financing investment properties. Here at Canadian Mortgage Experts, we pride ourselves on helping real estate investors reach their goals. Regardless of your investment goals are to buy and hold or to fix and flip, we take your investment journey seriously and we will always provide a wide variety of options to suite your unique situation.

Questions Your Lender Will Want To Know Is As Follows:

How Many Units Does The Property Have?

Any property with 1-4 units will be considered residential and securing a mortgage will be slightly more challenging than the usual residential mortgage. Smaller properties, the loan to value rate will be up to 80%. If the property has more than 5 units, this qualifies as commercial zoning and will be more difficult to qualify for. If you do qualify, your interest rates will be much higher. You will be required to work with a mortgage specialist who offers commercial mortgages.

Will You Be Living In The Property?

Do you plan to live in one of the units? If so, then this is considered owner occupied and gives you advantages when it comes to providing a lower down payment. If you won’t be living in any units then it will be considered non-owner occupied and you will be required to pay a higher amount towards your down payment.

How Much Do You Have Towards A Down Payment?

Down payments can often be the deciding factor when it comes to an investment property.  Whenever you invest in a property that you will not be living in the minimum required down payment will always be 20%. If you do plan to live on the property, then your down payment will be 5% of the first $500,000 and 10% of the balance up to 1 million and then upwards of 20% for the remaining amount. Only some lenders will allow a gift towards a down payment when it comes to investment properties. Keep this in mind when applying for a mortgage as this could cause a deal to fall through at the last minute if you have not disclosed the necessary information ahead of time.

Will This Be A Smart Financial Investment?

Lenders will always question the investment as to whether this will be a profitable investment on your part and theirs. They will not want to lend you money for something that isn’t likely to be a good long-term investment. How they answer this important question differs between lenders. Often lenders will use the TDSR (total debt service ratio) to see if you qualify for the mortgage at hand.

Rental Income And The Total Debt Service Ratio

There are several ways that lenders calculate rental income into the TDSR and to complicate matters even further it is different with each lender.

• Sometimes they use a DCR (Debt Coverage Ratio)

DCR: Net Operating Income/Debt Service

If the lender uses this calculation, they will be looking for a 1.1% return on a rental property in order to approve it. 

• Some lenders will use the Rental Offset Rule which decrees that 50-80% of the rental income must offset the (PIT) Principal in Trust plus taxes, debt obligations, and mortgage payments on the subject property. 

• The most used calculation is the Rental Add Back where 50-100% of the rental income is combined with the household income of the TDSR calculation.

It isn’t expected for a buyer to understand all these calculations and formulas, your mortgage expert will inform you which formula, calculation and factors the lenders will be using to determine your qualifications. 

How Many Properties Do You Own?

In this situation less is more. As you take on more rental properties lenders will add all your debts together and this will impact your ratio negatively and make it harder for you to qualify for more mortgage funding. 

What Are You Worth?

Lenders will always consider your net worth when deciding if you qualify for a mortgage. If you do not hold a net worth of at least $100,000.00 then you quite possibly won't be up to their standards.

What Qualities Should You Look For When Creating Your Mortgage Team?

When looking for a suitable mortgage expert you should also have your list of things that you’re looking for as this is quite often a large addition to your financial profile. It is quite a bit more challenging to qualify for a rental property mortgage compared to a typical mortgage. Seek a mortgage expert about the qualifications, experience and see if they have any reviews available to view. 

Once you have found your mortgage expert, you have successfully found the captain to your mortgage team! Now it's time to ask specific questions when looking for a lender.

Flexibility: Will they consider the rental income from the units that are non-conforming? 

Will they accept your mortgage despite a greater TDSR?

Are they understanding? 

Will you be able to use market rental appraisals within your application?

Am I valued? 

Is there a minimum net worth requirement? 

How do they feel about low minimum credit scores?

Do they allow things to be done your way? 

Can I put the rental property in my company name?

Are they trusting? 

Am I able to use a gift or borrowed amount towards a down payment?

Will they give me what I want? 

Can I finance more properties? 

Can I have a second mortgage? 

Can I get cash back for needed future renovations? 

Can I acquire a line of credit on the rental mortgage?

We hope after reading this that you feel informed, empowered and ready to make your financial dreams and goals become a reality. You have the information needed to pick an appropriate mortgage expert, find a lender with your best interest in mind, and you are now able to assess a property to make sure it is a good investment. This may seem like a large daunting task, but at Canadian Mortgage Experts we will streamline this process for you, and make sure to take the guess work out of every aspect of this process. Feel free to contact us at anytime with any questions you may have. We look forward to working with you.