Does applying for a mortgage seem overwhelming? With all the complicated rules and jargon, it’s easy to feel like you’re at a disadvantage when dealing with your bank or mortgage broker. This week’s guest is here to help. Brian Gbarazia is a mortgage broker, finance expert and author of the book Master Your Mortgage: What The Bank Won’t Tell You About Buying the Right Home. After earning a bachelor’s degree in Business Administration, he spent over a decade gathering game-changing skills, knowledge and wisdom from his roles as a financial advisor and mortgage underwriter at Canada’s largest banks and credit unions. I sat down with Brighton this week to find out what your bank is really looking for in a mortgage application. 

 

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. This episode of the Maple Money Show is brought to you by Willful. Did you know that 57 percent of Canadians don’t have a will? Willful has made it more affordable, convenient and easy for Canadians to create a legal will and power of attorney documents online from the comfort of home. In less than 20 minutes and for a fraction of the price of visiting a lawyer, you can gain peace of mind knowing you’ve put a plan in place to protect your children, pets and loved ones in the event of an emergency. Get started for free at maplemoney.com/willful and use promo code Maple Money to save 15 percent. Now, let’s chat with Brighton… 

 

Tom: Hi, Brighton. Welcome to the Maple Money Show. 

 

Brighton: Hi, Tom. Thanks for having me on. It’s a privilege to be here. 

 

Tom: Well, I’m glad to have you on. You’ve got a book out called Master Your Mortgage: What the Bank Won’t Tell You About Buying the Right Home. What I found interesting was the second half of that title, because you’ve got me interested in what we don’t know. I’ve obviously had my share of mortgages, going through the whole approval process, but I don’t always understand what’s going on behind the scenes—if I’m getting a good rate, good options. I’m lucky enough that I haven’t had any real issues qualifying because I have a stable job and all those things. I know there’s a lot going on there. And sometimes there’s even a bit of wiggle-room with some of these too. How does this process look with banks? Is it what we expect? Is it the usual credit scores? Is it time with income? How do banks look at this on a high level? What are they looking for that we might not be realizing? 

 

Brighton: The book I wrote was just to give that feedback at a high level, to let you understand what the banks are looking at for your application. Approvals are done in a systematic method. What I mean is, that there’s usually a system the banks go through to approve the application. That system generally starts with what they call the five Cs. When I was an underwriter, you were trained to underwrite files that way. You go with things such as credit, collateral, capital, capacity, and character. Those kinds of things are what the underwriter uses to approve your application. What I wanted to do with the book was just give you an insider look at how all those things play out in your application. That’s what the book is really designed to do, give you what the banks actually look for in your application, which (hopefully) helps you feel a little bit more knowledgeable in terms of what they’re looking at. I kind of break it all down. But at a really high level, we don’t approve or decline applications simply due to poor credit or the property. There’s a system behind it that usually follows around the five C’s of credit I mentioned. I’m happy to go into a little more detail if you want, but that’s the big, high picture of it. 

 

Tom: Maybe if you could just explain the five Cs. Things like credit and collateral make sense. Character sounds interesting. I always understand the numbers side more so I can understand if someone’s got a certain credit score, they make so much income for so long, they have this much down payment. All these actual numbers make sense. But if you could kind of go through the five C’s just briefly, what they include—especially something like character because I’m wondering what that is looking for. 

 

Brighton: Sure. We’ll start with the easy one, personal credit. Credit, for the most part, is just mostly around your credit score. This is just the stuff they pull from the bureau. Most people are familiar with that. Capital… if you’re buying a home, there’s a certain down payment you need to have. That’s where we’re referring to the capital. The collateral is also something people understand. That would be the property itself, your secureness of the home, which would be the collateral. Collateral can also function as a fallback. For example, if we have questions regarding your income, if you have a large investment, we may consider that a good collateral fallback for the application. Capacity and character are the two things people are not quite familiar with. Character just speaks about your credit character. We’re not necessarily speaking about how nice a person you are and that kind of stuff. We’re really focusing on your application. Are you truthful about what your intentions are with the application? In terms of when we look at your credit history, do you keep your credit payments? If you’ve got loans, do you make sure you’re paying them on time? That’s what we’re referred to as a character itself. And that’s important because sometimes the worst thing you want is to submit an application to a lender and maybe you’re not truthful about it, and they discover that. That would be a huge problem for them because if you’ve lied about that, how do we know if the entire application is being lied about? Then the last thing is capacity, which is really speaking to what is it that I have to get for the bank to give me approval? So there are usually two ratios around capacity. There’s gross debt servicing, and then there’s what we call total debt servicing. And those have specific numbers that you have to hit (particularly with the big five banks) in order for your application to be approved. When you look at the credit application process, as a borrower, you’re not going to be approved solely on one of those things. The underwriters are looking at all those things together. There are some metrics you have to hit in those specific Cs that I’ve mentioned. For example, if you’re going to buy an insured mortgage in Canada, you need to have at least a minimum of five percent. If everything is good—your character is good, your collateral is good, your capacity is good, but you don’t have five percent, that application will not be able to be approved. And it’s the same thing on the capacity side. If everything else is good, but unfortunately you don’t have the capacity to be able to afford the mortgage and meet those ratios, which again are typically 39 percent and 44 percent, you still will not get approved. That’s kind of what a lot of those five C’s are referring to. That’s how all lenders will look at all the applications that are coming through. When we speak to each of those areas there are some that are stronger than others. The underwriters receiving the application are looking at it from the whole standpoint. 

 

Tom: So character isn’t that you can just charm the person into giving you a mortgage? 

 

Brighton: I wish it was that simple, but no, no. 

 

Tom: You mentioned the different debt ratios. One of the things I’ve heard before is that there can be a little bit of leeway there. Say, if you’ve got your 20 percent down on a house, I think you get a little more room. Are some of these things sort of a give and take? I guess there are certainly some really hard lines to this you can’t cross, but there seems to be a little bit of movement there if you meet certain things. 

 

Brighton: At a high level, insured mortgages are insured through one of the major insurers. That’s usually CMHC. Those are typically hard. They’re not going to go above those ratios I mentioned earlier, the 40, 39 and 44. However, when you get into what we call conventional, which is your equity, where you’ve got 20 percent of your equity in there, you’re not going to get a high ratio mortgage, an uninsured mortgage. There is some flexibility given the individual applicant. But again, it’s not that much. What I’m saying here is, my book is really to give you what you need to make sure you don’t have any issues. If you have a particular relationship or there’s something that’s unique to your application, it’s possible those numbers might be slightly adjusted. Possible, is the keyword here. But typically, all lenders are trying to stick within those ratios because those numbers come from the regulator. It’s not a thing where they can just make up those numbers, particularly the big five banks. Private is completely different. In my book, I’m speaking about most of the banks all of us are familiar, which is the big five in terms of how they approve your mortgages. You are right, Tom, there is some flexibility. But I would say that’s more on the conventional side, which means you’ve got more than 20 percent down payment. Or maybe you’ve got a lot of assets where the bank can find other ways to make the case on why they’re going outside their normal guidelines. 

 

Tom: Now, you mentioned capacity. Is that where you get told how much mortgage you can have? In my own experiences, sometimes I feel like it’s been a little tight. It’s like, “Oh, I kind of want more house.” I remember when I got my first house, it felt like it was too much. They were saying I could have whatever the amount was for the mortgage and I said, “No, I can’t.” I knew it was a payment that was bigger than I was comfortable with. 

 

Brighton: Yeah, you’re absolutely right. Capacity is typically where we get them on a mortgage that you can qualify for. Now, each lender has different guidelines, which is where that number can be different. When I say 44 percent, I could go with another lender and you could get more of a mortgage based on how they’re qualifying that number. It’s possible to have different mortgage amounts because different lenders have different guidelines in terms of how they come about that number. But typically, it would still be around 39 percent for your gross debt servicing and 44 percent for your total debt service in itself. And then, like I said, on the conventional side, there is some flexibility, but typically, again, it’s going to be around those numbers itself. So, if you hit those numbers, that’s typically where you will get your mortgage loan amount numbers from. 

 

Tom: When we talk about how much mortgage you can afford, is this where pre-approval comes? Are pre-approvals real? I guess they hold some weight, but they’re not a guarantee by any means. You could have something change between that pre-approval and the actual mortgage date. 

 

Brighton: In the book I bring this up because pre-approvals, in general, if you’re working and using them for the right way—and by that I mean you’re spending time to have a conversation with someone to figure out what is the right amount of mortgage for me? What is the right capacity for me to be able to handle? Not, what the bank tells me I can get approved for, but what kind of lifestyle do I want to have and what’s that mortgage amount that can allow me to live that lifestyle? Then a pre-approved is great. It’s you spending time prior to you starting the journey to kind of figure out what that number is. When that journey gets going and emotions are really high and you really love that house and you really want to get it because it’s the right neighbourhood, you kind of have some fallback to say, “Okay, we can’t go over this budget because that’s not going to fit our lifestyle.” What I find in the industry is that pre-approvals tend to be is more of a psychological tool that’s used to get people locked into buying a home because they get their approval. And like you said, Tom, we’ve all been there. You get your 90-day approval and you’re on your way. You start shopping. There’s really no conversation, to be honest with you, because you just get your rate. The bank tells you you’re preapproved for $300,000 and you start shopping. I find the tool, nowadays, is not being used effectively as it should be. It’s really a tool designed for you and whoever you’re working with, whether it’s your bank or mortgage professional, to sit down and really figure out what the right mortgage amount is for me. Because the bank may approve me for whatever, but that may not be the right amount I want. If you use the tool that way, it is a fantastic tool because then you can talk about all the components around homeownership and really figure out what that number is before you start applying for your application and start home searching. It is a great tool. I encourage people, particularly first time homebuyers, to use it. You just need to be disciplined and make sure you use it in the right way. 

 

Tom: Yeah, I guess it at least gives you that conversation instead of you going and putting down a deposit on the house and then finding out that no one’s going to give you a mortgage for the place. 

 

Brighton: Sometimes what happens with pre-approval too is, that they forget that it’s a pre-approval. Depending on how you’re doing it, you may not be doing a full credit application on that. There can be situations where someone believes they’ve been approved and got their pre-approval, believe they’re good to go, then they go out and buy a car and that screws up everything. It’s one of those tools you really need to be aware is designed for you to talk about with whoever you’re working with to figure out what that number is and prepare yourself for this journey. And hopefully, if you have that conversation prior to getting started, you’re less likely to make decisions that may in the moment feel good, but in the long-term, set you up to not feel good. 

 

Tom: Yeah. The car is a great example because if you’re paying hundreds of dollars extra a month all of a sudden, that’s really going to mess up those debt ratios really fast. 

 

Brighton: Absolutely. And that’s happened. It happens quite often.

 

Tom: I’m sure it happens quite a bit, actually, because you don’t really think much of it. It may only be a $30,000 car or something like that but those monthly payments are really where it’s going to mess you up. 

 

Brighton: That’s right. 

 

Tom: Now, you said how there’s the 20 percent down, the five percent down. Is there an option? I believe you mentioned in your book that you can be 100 percent financed. Is that really a thing? And how do you go about doing that? 

 

Brighton: The 100 percent finance is a thing. They’ve changed it a little bit. Basically, what that meant (back in the day) the traditional applicant would save up their down payment in a savings account, RSP or whatever. A few years back, you used to be able to actually come up with a down payment from a borrowed source. For example, let’s say you need $25,000 and you don’t have that on hand cash, but you do have a line of credit for $25,000. You could have used that as your down payment. And what the bank would do would is factor in the monthly payments you have to make back on that line of credit into your mortgage application. Then, effectively what you’ve done is, because you’ve borrowed the other 95 percent of it, you have 100 percent financing. They’ve tweaked it a little bit for first time homebuyers. CMHC doesn’t do that program anymore but their insurers still do that. But you can still do  it on the first time homebuyer program. By that I mean you can use it as your five percent. But you could do 100 percent financing. I would tell people on the conventional side, most people buy an investment product from their equity line of credit, which is, again, borrowed sources. So technically, that whole loan is 100 percent financed because there’s no real physical cash. It’s just equity from their property that they’re using to buy another property as their down payment. it’s a little trick, but I think a lot of people will be surprised to find out that was even possible in Canada because we tend to associate that with the US in terms of when they had their whole housing market go down. That was a thing we did in Canada too. And you can still use those programs. Not for the first time homebuyers. But if you’re buying a second home, you definitely can still use that program today. 

 

Tom: Another thing I saw in your book was BNI score. I’d never heard of this before. I focused on credit score many times, and I’ve never heard of a BNI score. Just a little side question, but can you explain what that is? 

 

Brighton: Yeah. Bankruptcy index is basically what that is. The whole point of a BNI score… And each lender is different in terms of how much weight they put into that. You always get your credit score, which all lenders do, but some lenders may not pay any attention to your BNI score. I just thought it was important to have that on there because I worked for a lender where that was a huge part of getting approval. But the BNI score, basically, is trying to capture individuals who use credit to pay off credit. Someone’s credit score could be great, but they could just be moving money back and forth between credit products. The BNI score is meant to help lenders find who those individuals are. They’ll have a great credit score but they’re BNI score is really low. That can tell us it’s possible this person is actually just moving credit around to cover their bills and eventually they can go bankrupt. That’s one to keep an eye on. You can get that from Equifax if you’re  interested in finding what your BNI score is. But I would still say, focus on the credit score because that’s what most lenders use. Just be aware of the BNI because that’s also important. If you’re paying your bills with cash on hand and you’re not moving credit around, you’re going to have a good BNI score. 

 

Tom: That’s interesting. I mentioned just last episode with Alyssa Davies, when I was young, I was paying off my credit line, then spending on credit cards, then paying off the credit line. It was kind of this constant moving around of debt. It was a forward motion in that I was reducing the total balances by basically putting all my paycheck into the credit line. But then I was using the credit line to pay the credit card so it was still a case of not using my cash at all. Because my income was paying the credit line, but my credit line was paying the credit card. 

 

Brighton: I didn’t know about this either until I got to this lender and asked, “What is a BNI score?” I had never seen a BNI score so when I found out about it, it kind of made sense. There are individuals who have great credit score, but when you look at their credit profile, you tend to see credit just being move back and forth. Or you may see an income level where it doesn’t make sense for this person to be able to keep up with all these bills. That’s because they’re just moving things around. That’s the whole point. Like I said, the score goes from 1 to 99. The higher you are, the better. For those listening,  if you’re paying your bills on time and you’re not moving around credit back and forth, your BNI is fine. But if you’re someone who does move stuff around it might be something for you to really pay attention to because, for some lenders, it might be the reason they don’t move forward with your application. 

 

Tom: One of the problems I had when I said one of my mortgages felt like it was a little tight, was that bank didn’t want to take dividends into account. Through my business, I was paying myself as dividends. They really don’t want to use that. The next time I went for a mortgage, they kind of said the same thing, but they said it would help boost your case at least. It might get you past that little bit of wiggle room. It seems like something to consider. Obviously, a full-time, T4, kind of job seems to have more weight than one that pays dividends. I’m sure there’s other forms of income that are probably looked at less favorably? 

 

Brighton: Yeah, self-employed individuals always struggle because when you’re self-employed, you have the capacity or ability to write off expenses. If someone makes $60,000 in their business, they may have expenses of $5,000, for example, in a year. And then their net income will show us, $55,000. The trouble for self-employed is that they’re making really good money, but obviously they’re going to write off expenses to reduce their taxable income. But, when you go to apply for a mortgage application, they look at you in a way that is a natural reflection of what your business actually made, growth-wise. Remember, individuals who work for a company, the lender takes their gross income. It would only be fair to the self-employed individual to take their gross income. That’s where they struggle. The thing I usually tell self-employed individuals is, you want to show consistency. What the bank’s looking for is, if you just started your business and you made $100,000 this year and you paid yourself a dividend, the bank’s not going to be interested in that. They want to see if you’ve been doing this for two or three years. The longer you’ve been doing it for, the more comfortable they feel with that. Typically, it’s two years. They do have ways to calculate self-employed income in the sense that they can gross-up your income. If you’re doing dividends, they’re probably filled out more as an investment-based income. And what you have to do is just make sure you can show a steady history of being consistent. And they want to see those dividends being consistent, too. They don’t want to see that one year you paid yourself $60,000 and then the next year you paid yourself $30,000. You want to show a consistent income stream that you’re paying yourself, which would sort of reflect someone who’s working for a company where they get a consistent income year-after-year. There’s lots of ways around it. But the big thing for anyone that’s self-employed is, you need to be aware, that minimally, you’re going to have to show two years of history. And whatever income you’re paying yourself, you want to make sure that income is stable in the period you’re applying for. I always tell self-employed individuals, if you know in two years you’re going to apply for something, you may want to take the hit on the tax side to try to get as much income as you can so the bank can see actually what we earn in our business rather than saving our self, taxes. Because now we can’t qualify for the home because we don’t have enough income, even though we do. I hope that kind of makes sense a little bit? 

 

Tom: No, it’s a great example. Even beyond dividends, if someone’s self-employed, say their business has them on the road a lot like a real estate agent or anything that involves travel, all of a sudden, your car, some of your meals, all of that kind of stuff is kind of coming off your supposed income, in the end, you end up at the same net amount. But if the banks are looking at it differently, then it looks like you’ve made nothing, even though all of your expenses day-to-day are kind of covered by the business. 

 

Brighton: That’s right. When you’re self-employed, you need to plan out your stuff more because we understand why you’re writing that off. You don’t want to pay a huge taxable income if you can reduce the taxable income. But when we’re applying for an application, we have to kind think, if it’s going to be two years where you’re going to be thinking about buying something, you need to work it up to that level to be able to show the lender, this is actually what is made in the business. Then you need to be able to show a consistent income stream for the lender to feel comfortable with that. Again, as far as self-employed works, most self-employed individuals are not aware of that. And what happens is, they go to buy a home and they’re frustrated because they’re going, “I make really good money in my business, but you guys are looking at like the lowest income, and that’s because I write everything off.” Once I meet someone who is self-employed, I spend the time to let them know this is what we have to do if we’re going to be applying for a mortgage. After you’ve got your mortgage, if you’re not applying to anything else, sure, go back to your regular reduction of expenses. 

 

Tom: One other thing I wanted to ask you about that I believe you’re not a fan of is, mortgage insurance. Whenever I get a mortgage, it’s really heavily pushed on. They almost make it sound like it’s an absolute condition, but it’s not. What is this and what’s wrong with it? 

 

Brighton: Mortgage insurance. When I was a first time homebuyer (talking about my experience) just seeing this big number on there, I said, “What is this $10,000 that I have to pay for?” They said it was mortgage insurance. I wondered, “Does it cover me if I lose my job or something?” They said, no. It covers the lender. So, I’m paying this fee but it doesn’t cover me if anything goes wrong in my life. It covers the lender if I can’t make payments. Yet, I’m the one paying the fee. There’s a lot of issues I have with that. The reality is, in my book, I try to explain that if you were lending money to someone… Let’s say they came up to you and asked for $100,000, would you feel more comfortable giving the person 50 percent of that or 95 percent of that? If you have to give someone 95 percent of that amount, wouldn’t you feel better if you knew there was no way for you to lose the money if they decided not to pay you back? In short, that’s what mortgage insurance is. The lenders are basically saying there’s no way we would give someone… Let me use the example I give in my book where $768,000 is the average home price. There’s no way we would feel comfortable giving someone 95 percent of that without having some sort of guarantee that if they lose their job or for some reason they can’t make the payments, we’re made whole. That’s where the government invented mortgage insurance. It’s basically a way for everyone to be able to get mortgages, but also give some assurance to the lender. It’s not all bad because the reality is, most of us don’t have 20 percent down on our first home. Without mortgage insurance, we wouldn’t be able to get a home because even 20 percent of $100,000, is a lot of change to save up for. It’s not my favorite thing, but I understand why it’s there. I think it would be good if they invented a program in the sense of like maybe it’s possible for us to get some sort of benefit as the homeowner if something does go wrong. But I imagine that’s not going to happen. I’m sure the lenders would say, “No, that’s okay.” And just a quick point. If you look at bank financials, you’ll see that they always try to get their book of mortgages to be about 50 percent insured and 50 percent conventional because basically 50 percent of their book is guaranteed because they’re not going to lose money on that, even if you lose your job. The other 50 percent, usually they got 80 percent lending at the most. If the market does drop, they’ve got some buffer there to make sure they’re not going to be out. 

 

Tom: So, up to 20 percent is the CMHC insurance. That is required. But it’s just said in my case, I’m putting down 20 percent and the bank is doing their own insurance on top of that. I know that’s a different kind of insurance. I guess it’s mortgage life insurance. It seems like such a terrible deal compared to getting regular life insurance because it’s a balance that’s constantly dropping. And again, it’s only protecting the bank. 

 

Brighton: Oh, I get you—your traditional mortgage insurance versus term life insurance. I agree with you, Tom. Personally, I have term insurance because I agree with you. Again, if that’s your only means in terms of you qualifying to get that, absolutely, get that because it’s your biggest investment. But if you have other options—if you’re asking me between term life insurance or mortgage insurance, I would probably lean more into the term life insurance just for the points you pointed out, Tom, which is that value will stay constant and we’re not going to be paying the same amount of money, but yet the coverage is going lower, on the traditional mortgage side. Definitely, I’m with you from just a finance standpoint. That’s what I would do and probably recommend. But again, with all clients, the best thing if you’re helping a client is always give them the option to get that mortgage insurance. Because what people may not realize is, if that is an offer to you right there and then and let’s say you do try to get term life insurance and you don’t qualify for it, that could put you in a really big pickle. It’s always important to get the client to at least have something in place. Then, obviously, you can go talk to your insurance specialist or whoever and figure out a better option for you. But from a financial standpoint, yes, I probably would lean more towards term. That’s what I have myself personally, rather than doing that mortgage insurance because I don’t want to keep paying the same amount for less coverage over time. 

 

Tom: Plus, the sooner you get into life insurance, the better, just health-wise, age-wise. Get the better rates locked in. I do like though that you mentioned that for some people, maybe they should look at it—if they don’t have life insurance to get the mortgage insurance. Because if you’ve got a family, especially, and something happens to you, you don’t want the mortgage still sitting on the estate. That would be a problem. And it can always be cancelled too, afterwards. You’re not locked into that. 

 

Brighton: Typically, it basically gets you on there so you have some coverage. That gives you time to go find whatever your proper coverage is. I’m not an insurance person so you can go speak with someone who’s licensed for that. But you don’t want to be in a situation where you have nothing on the biggest asset you’ve bought. If it was me, I definitely would get term life insurance, but not everyone can qualify so maybe they qualify for the mortgage insurance and that’s better than nothing. 

 

Tom: Yes, for sure. If someone’s looking at a new mortgage and they don’t have life insurance, it makes sense. Once they’re all settled into their house, they can always go and look at what’s next. 

 

Brighton: Exactly. 

 

Tom: Thanks for running us through all this. There are a lot of little things that people don’t always consider. It’s not just your credit score and your income. There’s a lot more here. I think your book does a great job covering a lot of that. Can you tell people about your book and where they can find you online? 

 

Brighton: Yeah, sure. The book is called Master Your Mortgage. You can find it anywhere on Amazon. It’s available now. And the easiest way to get a hold of me is just go to my website. It’s called, wealthmarathon.com. You’ll be able to find all the details to get a hold of me if you need to get a hold of me. 

 

Tom: Great. Thanks for being on the show. 

 

Brighton: Thanks, Tom. I really appreciate you having me on. 

Tom: Thank you, Brighton, for clearing up some of the confusion around getting a mortgage. The process is a lot easier when you understand it from both sides. You can find the show notes for this episode at maplemoney.com/196. If you still haven’t done it, head over to our YouTube channel and subscribe there. We’ll be getting back to releasing never-before-seen content, soon. Either search for Maple Money or go to maplemoney.com/youtube and subscribe today. Thanks, as always, for listening. I really appreciate it and look forward to seeing you back here next week.