The rules for buying a rental property have changed quite a bit over the last few years and it’s a little harder to buy a rental than it was several years ago.
As of a few years ago, you could buy a rental property with as little as 5% down. Over the last few years the rules have tightened up so that you can no longer get a rental property mortgage with less than 20% down. In fact, with most lenders you are now required to put down a minimum of 25% down on a rental. This makes it much more difficult to get into the rental market unless you have the cash or equity in another property that you can refinance.
In terms of qualification there are two methods of calculating rental income that lenders use. The first method is where lenders use 50% of the rental income on the property and add it to your income. This method is unfavorable and doesn’t help you much in qualifying for the mortgage. With this method you basically have to use your own income to qualify for the mortgage.
The second method of calculation is where lenders use 80% of the rental income and deduct it right off of the mortgage payment. This method gives you a lot of help in qualifying for the mortgage. For example, let’s say the mortgage payment on your rental property is $1000 per month. Then let’s suppose the rental income was $900 per month. With this method we can use $900 x 80% = $720 per month of the rental income and deduct it right off of the mortgage payment so you only have to qualify to service a mortgage payment of $280 per month ($1000 – $720).
In terms of the above two methods we work with different lenders to get you the best rate while using the rental method that will help you qualify the easiest for the mortgage.
In terms of basement suites, on mortgages where you have less than 20% down lenders will only add 50% of the rent to your income and so this does not help you much in qualifying. It will help you significantly with your mortgage payment; however, for qualifying it doesn’t help you much. If you have more than 20% down most lenders follow the 50% rule on basement suites with the exception of a couple that will use the 80% rule above.
If you are self-employed and don’t declare a lot of income we also have lenders that will do stated income for rentals. This means that we can “state” a higher income than you declare on your taxes and still help you qualify for the rental property mortgage.
The final thing we want to note here is that most lenders have a cap on the number of properties you can own. Usually this cap is 5 properties meaning a personal residence and 4 rentals. After this point you then need to apply for commercial financing. This isn’t the case with all lenders but for the majority of them.
As you can see there are many ins and outs to qualifying for rental properties and it is not as simple as it used to be. We are here to help you navigate your situation to give you the best chance possible to get the mortgage that you need for your rental property.
For more information on our mortgage products please visit our website at www.ymscanada.ca.