17 May

Investing in a stress tested lending environment


Posted by: Robert Ganzhorn

investing sign

Has the stress test has resulted in funding declines for your investment portfolio? Whether a refinance or a purchase its definitely harder to get money in this environment.

Here are some items to consider which may make it easier to qualify under the stress test.

Property types

Consider purchasing  2 to 4 unit properties not just single family dwellings. These properties are still insurable and while a stress test still applies it’s the insurable stress test which is easier in some cases than it’s conventional counterpart. You’ll also get the benefit of better insured mortgage rates.

Multiplex properties (5+ units) are considered commercial and use a different underwriting framework – GDS/TDS ratios don’t apply and neither does the stress test. That being said they are individually underwritten and the underwriting framework is certainly no cakewalk but doesn’t include you personal income and obligations – the building is expected to carry itself.

If you’re a large market investor expand your horizons and look at smaller market properties that are less expensive. They may garner lower rents but the lower mortgage amount may make the purchase a possibility.

Income and obligations

Since you’re being qualified under the GDS/TDS framework manage the items affecting these:

  • For those of you that are business for self you may want to report higher income for the past year. Self employed income is typically taken as the average for the past two years so a higher income this year will boost the income on your mortgage application. And since self-employed tax returns aren’t due until June 15th you still have time to consider this option for this year
  • Consider reducing your rental expense claims to report more income
  • Your unsecured debt balances (credit cards and personal lines of credit primarily) are included in your applications as an obligation equal to 3% of the outstanding balance rather than the minimum payment. Consider moving those debts to fixed payment loans if it makes sense or even better pay them off if possible
  • Find ways to increase your down payment to reduce the mortgage amount. Liquidating under performing investments is an option as is partnering with another investor

Who are you borrowing from?

Use an alternative lender that allows for higher GDS/TDS ratios and/or allows for a higher percentage of rental revenue to be recognized in your application. Their rates are a little higher but for the right investment these lenders can provide a viable option.

Don’t always use a bank. There are still lenders out there with good rates that don’t stress test.

What property are you borrowing on?

A lenders that provide equity lending on principle residences still exist and typically these offerings allow for much higher ratio allowances. If your principle residence has a low LTV there are A lenders that provide good rates for these programs. Use the money borrowed to invest

Remember that each investors situation is different and needs to be assessed on a case by case basis.