When will banks stop giving you mortgages? How do you avoid this?

Question

Hello,

I'm starting off in real estate investing - soon to make my first purchase. I want to own many properties, but at what point will banks stop giving me loans? How do I avoid this?

I was speaking with an investor and he said you can start a company and invest as the company - you would act as the guarantor and the property would not show up on your personal liabilities.  Is this true? Can someone speak on this?

Chris Baxter · Answer

@Cameron Tope ... we don't have 'Freddy/Fannie' loans in Canada.

@Simon K. Investing as a company does not make a difference and would make it harder to secure a loan since the company doesn't have a credit history.  The reason you run up against the 'debt wall' as we call it is because lenders typically only allow 50% of your rental income to be counted against 100% of the property expenses. This effectively treats cash flowing properties as cash draining properties and puts your DCR upside down after 2-3 properties.  Strategies to overcome include:

1) Invest in larger properties (MF 6+ units) as these are secured with commercial mortgages that have different lending criteria. Here, a corporation is useful

2) Work with a mortgage broker as they can identify lenders that may consider a higher portion of renter income

3) Partner / JV with others; you can be the deal finder and they can be the money partner

Regardless, don't let the above stop you from going after your first property.

Account Closed · Answer

@Simon K.

Lenders each have slightly different criteria. You can still get 7 total through TD if you can jump the DCR hoops which are ever changing and lately have become more difficult. Even location matters as oil based economies like Alberta have lenders gun shy still. Another thing is that the big 5 are starting to change their historical tune and push business to the branch as opposed to the lender channel. Branch folks have greater leeway in making exceptions now. It seems like they’re finally figuring out the $ they’ve been giving to mortgage brokers could be kept in house.

Also, credit unions are going to be your friend after about 5-7 properties. They have entirely different qualifications. And if they’re local and you have a relationship, you’ll be better off. Open a CU account and use it for the next couple years at least if nothing else.

This last April, TD finally cut me off. It was a “polite” cut off as they approved my application but required 25% down, then upon my request for re-evaluation they said 35%, then 50%, then finally on the day of close they said 25%. I had already secured financing through CIBC @ 20% - 30yr amm but it took a 3.5” binder packed FULL of every single document they needed and me walking in to my local branch on a Friday at 9am and saying “this is literally every document you’re going to ask me for, but I’ve only got 6 days to get this done.”... the mortgage fellas jaw hit the floor and thankfully they made it happen. It didn’t hurt that they had the details on every other property I own and likely were targeting having those transferred to their control at some point but still. Leverage a personal relationship if you can. Build trust and reputation. Keep meticulous books.

Lastly, learn about B lenders. I haven’t had to and likely won’t go down that path but it’s a legitimate option in the current lending climate.

Jonathan Alphonso · Answer

The first thing I'd say is not to worry about getting too many properties if you currently have none. Eventually everyone hits a wall in terms of their borrowing limits, and that should be seen as a sign of success!

Assuming your credit score and employment are good, the key issue you'll run into is your debt ratios.

The banks and B lenders will use your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.

I usually recommend that people use out the CMHC provided Debt Ratio Calculator

There is also the government of Canada's Mortgage Qualifier Tool which is quite good.

Make sure you enter your T4 reported income into these tools for accurate results. These tools have up to date guidelines on what the banks will require.

If you first start hitting a wall with the banks, try a down-payment of 20% or more. These types of mortgages don't need insurance and have more lenient debt ratio criteria.

You can try making inquiries at each of the big 6 banks or try using a mortgage broker. Just make sure that they don't string you along for months, which unfortunately is a typical story in Canada.

If you hit a wall with every bank, you can try some of the major B lenders such as Home Trust and Duca Financial. They charge rates of 4% to 6% usually but are much more lenient with approvals than banks.

Private lenders don't actually care about debt ratios, but they will charge 7% to 12%. They are generally not great for real estate investors since the rate and fees can eat up all your profit. But they are a good last ditch option especially if you are buying a property way under market value and need a mortgage fast.

Cameron Tope · Answer

Use your Fannie/Freddie loans first and worry about this once you own 5 properties.

Many investors never get past 5 properties...

Steve Morris · Answer

Well, a lender will always look at you personally and at the property's ability to service debt if a commercial loan.

So you need to structure your empire and remember to make sure you're maxing out on NOI.

Know plenty of guys with >1000 units and they keep buying with loans.

Vincent A. · Answer

I suggest finding an investor friendly (as well as knowledgeable) mortgage broker who can really assess your situation and find multiple ways for you to make the deals happen. It might take some time talking with a few who you can really connect with.

Theresa Harris · Answer

Talk to your banker as there are different options.  When I bought a few places a few years back, with the third one they said that I was getting close to my max.  Mortgage rules changed shortly after that, so I never bothered to look into another one.

A few weeks ago I was curious, so I called to find out.  All they wanted to know was the value of the rentals and the rent.  They had most of the info on my regular income as I'd done retirement planning with them earlier this year and my mortgages are through them.  Long story short, they said I could borrow more money as long as I had the 20% down. This was through CIBC.

Mostly they will look at your income, equity and debt.

When will banks stop giving you mortgages? How do you avoid this?

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