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Mortgage brokers taking a closer look at who is buying

The Bank of Canada warned in late 2009 up to 10 per cent of Canadian homeowners might be in danger of losing their homes when interest rates started to rise from today's historic lows.

Is Canada heading down the same path as our neighbours to the south? Are we looking at a mortgage meltdown somewhere down the road? The answer from mortgage lenders and brokers is short and unequivocal: No.

A very small percentage of borrowers might be in danger, they say. But these are likely people who borrowed at rock bottom rates in the 18 months leading up to the start of the global recession in 2008.

"Two years ago, lenders were much more liberal when it came to qualifying people for mortgages," says Paul Grewal, president of lender Street Capital Financial Corp. "Then if you had a solid credit score and appeared to have the income to make the payments, any lender would take you on.

"Today the lending rules are very different."

How different? First, everything a borrower says on a loan application will be checked -- not simply accepted as fact, as was often the case pre-2008. Demand for at least a 10 per cent down payment is now a must; a higher down payment of between 10 and 20 per cent increases the chances of getting a mortgage. People seeking variable-rate mortgages must also prove they can make the payments on fixed-rate mortgages, which are at higher rates.

A Beacon credit score of at least 600 out of a possible 900, used by credit checking agencies such as Equifax to rate individuals' creditworthiness, is a must. And there are no more 40-year amortization schedules, which were withdrawn from the market in 2008.

Finally, no longer is lending based strictly on the perceived ability to pay.

"While every housing market across Canada is different, lenders tend to operate on a national level," says Sue Pimento, a Toronto regional manager for lender and broker Invis. "That means they may set the rules based on the experience in a city like Vancouver, where default rates were high during the early stages of the recession.

"Things may have fared better in Toronto or Montreal or Ottawa, but those same new rules still apply there as well."

"We are very different from the U.S.," says Grewal. "In Canada, borrowers are far more conservative as are lenders, and we don't have the range of exotic products they had down there. Here, basically we have either variable-rate mortgages or one-to 10-year fixed rate."

Lenders and brokers add, however, that despite lenders' best efforts to take a belt-and-suspenders approach to ensuring borrowers do not fall into default on their mortgages, it can and does happen. At the end of October, the Canadian Association of Accredited Mortgage Professionals reported 0.44 per cent of mortgages across Canada had fallen into default -- up from 0.25 per cent at the end of 2007.

"What we don't really know when arranging a mortgage is the actual lifestyle of borrowers," says Gary Siegle, Calgary regional manager for Invis. "They may meet the criteria for a loan of a certain size on paper but we don't know monthly and other costs they might also face like $1,000 a month for daycare, regular expensive vacations and rising credit card bills."

Then, too, there are the unexpected costs such as a spouse losing a job, a pregnancy or an illness, adds Pimento. "Brokers try to counsel them on these things before arranging a loan to make sure they don't take on too much debt," she says. "But people are people and it is not always successful."

The size of a mortgage depends on the borrower's ability to pay and the market value of the property they want to buy.

Any loan for more than 80 per cent of the market value of a home has to be insured by a company such as Canada Mortgage and Housing or Genworth Financial.

When it comes to figuring out how big a mortgage a borrower can carry, lenders might allow up to 44 per cent of gross income as a guide to monthly payments. The more usual rule of thumb, however, is about 30 per cent.

Any shortfall between the size of that loan and the purchase price has to be made up through a down payment, although lenders might allow buyers to borrow that as well through a second mortgage or other form of loan.

"Lenders are now being very attentive to proving all details of income," says Sean Binkley, a broker with Mortgage Intelligence in Ottawa.

"They will call an employer and ask for at least two years of tax returns. They may also contact the borrower's bank to look at four months of records to see if there are any other major regular monthly payments."

An on-site visit by an appraiser is also a must.

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