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Important Changes Effective January 1, 2015 - Do They Affect You?

Important Changes Effective January 1, 2015 - Do They Affect You?

Over the last 5 years we have seen some significant changes to the way that lenders qualify borrowers applying for mortgages. Each change since 2008 has made the process of qualifying for a mortgage a bit more difficult.

As of January 1, 2015 existing unsecured debt payments will be calculated using 3% repayment on the balance regardless of the contractual amount. Those debts and their corresponding 3% payments ultimately determine how much of a mortgage you qualify for. The more outstanding debt you have the less of a mortgage you qualify for.

Previously, lenders accepted the contractual payments for unsecured debt despite it being lower than 3% of a balance.

Let's use an example of a $25,000 line of credit that has been used. At an interest rate of 6% the bank would only require a minimum 'interest only' monthly payment of approximately $125. Lenders previously qualified a mortgage based on the low minimum payments issued by the creditor

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New mortgage rules will require the more conservative use of 3% of the balance rather than interest only when qualifying you for a mortgage. The lenders underwriting practices now require a payment of $750/month (3% of the $25,000 debt you have) be used. This has a significant impact on qualifying ratios.

As an example, if someone makes $65,000 a year and wants to buy a home, and let's say that the person only has one debt. That debt is a $25,000 line of credit that they used to help get them through university and the 'interest only' payment on that line of credit is just $125/month. Prior to the upcoming policy change, the client would qualify for a mortgage of approximately $325,000.

If we use the new policy of using 3% of the balance on the line of credit and add the payment of $750/month into their liabilities that means that they would go from qualifying for a mortgage of approx. $325,000 to $200,000. That is a pretty big difference of over $125,000 in mortgage amount.

Also, we must keep in mind that we are at 50 year lows on interest rates and lower rates mean you qualify for a higher mortgage than when interest rates increase.

If you would like to discuss your current situation, please do not hesitate to contact me directly.
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