Here's how investors can pass the stress test
Real estate investors typically pay higher interest rates than end-users, and now they have the mortgage stress test to contend with. Fortunately, one prominent broker shared a few tips to help investor clients pass the stress test.
Dalia Barsoum, president and principal broker of VericoStreetwise Mortgages, says that debt reduction and enhancing income are the best pieces of advice brokers can give their clients.
“I would look at getting rid of unsecured debt and replacing it with secured money, which would help you reduce the monthly calculations that lenders use,” she said. “Get expensive debts out of the way and focus on utilizing the maximum income on the client’s application.”
For example, if a borrower is leasing a car that has only $3,000 of payments remaining, but with $800 monthly payments, the lender only cares about the latter figure. Barsoum suggests paying the loan off entirely because that clears $800 on the borrower’s application.
“The other thing is avoid doubling up payments on mortgages. Look at alternative strategies to accelerate the mortgage pay down on a property versus doubling up the payment because that eats into their borrowing power.”
Another debt management tip is to avoid using credit cards that have promotional rates like no payments for six months, because, although they’re interest-free for a period, lenders factor those large monthly payments into their calculations, says Barsoum.
Since many real estate investors have existing holdings, Barsoum advises declaring every last cent of income.
“On the income side, what we’re doing is encouraging clients to report all rental income they receive from their properties on their tax return, even if it’s in cash, because some lenders don’t factor rental income if it’s not reported,” she said.
Furthermore, not all lenders use maximum rental income—some use 50%, others 80%—but some do. Barsoum says that while they charge higher interest rates, they might be worthwhile to get the ratios to work.
Nash Malik, a Mortgage Intelligence agent, echoes that statement. Hr has been bringing investor clients to credit unions since the beginning of the year to avoid the stress test altogether.
“We can qualify without using the stress test,” he said. “They pay a higher interest rate for that, but it’s a way to get around it. We’ve got lenders in the broker channel that look at rental income of anywhere between 80% and 100%, as opposed to a bank that looks at 50%.”
Nash added that MICs are option if avoiding the stress test is the desired option.
“I work with a lot of investors and we’ve mostly moved towards the B side and private lenders,” he said. “I’ve never done so many private lending deals up until this year.”