Multi-Family Mortgage Qualification – Forget Everything You Learned About Residential Property

I often hear “How do I qualify for a multi-family mortgage?” To this, I can only answer, “Forget what you know about financing a residential property!”- this includes qualifying for a mortgage. On a multi-family application, Canada Mortgage and Housing Corporation (CMHC) and the lenders do not review your Total Debt Service (TDS) and Gross Debt Service (GDS) ratios. Instead, they focus primarily on your overall net worth; particularly the value of your liquid assets (i.e. your RRSP or non-registered investments, stock and bond portfolios, equity in other real estate and cash). It is always interesting to know when a borrower owns classic cars, art, jewelry, an antique dish collection or other valuable items but unfortunately, the value of these assets is not generally considered part of your overall net worth for financing purposes.

CMHC’s rule to qualify for a multi-family mortgage is that the borrower must have a net worth of at least 25% of the loan amount. This 25% does not include the down payment for the property. The minimum net worth to qualify for a CMHC loan is $100,000. I am often asked is whether this rule applies to each individual who owns the property. The answer is “no” – it is common to see a guarantor who does not have the minimum $100,000; however, that individual should bring in a partner who does have a net worth large enough to meet or exceed the minimum. It is difficult to obtain approval for a mortgage when partners are trying to qualify with others that do not meet the $100,000 minimum. From CMHC’s perspective it would be difficult to recover a loss from a number of individuals who have a low net worth, than to recover a loss from one or two strong individuals.

Consider the following scenario with CMHC’s rules applied. Wendy and David are joint venture partners and they have an accepted offer on a 16 unit multi-family building for $1,000,000. Wendy has a net worth of approximately $548,000 and David has a net worth of approximately $87,000. Wendy’s portion of the down payment is coming from the sale of another property and David is receiving a gift of funds from his family. Wendy and David have requested a mortgage of $750,000 (75% loan to value). The minimum net worth requirement is $187,500 (25% of $750,000) above and beyond the down payment for the property. In this case, Wendy and David would be approved as borrowers because Wendy has a strong net worth while David is not too far from the minimum $100,000 requirement.

CMHC requires each borrower to submit their current net worth statement listing all of their assets and liabilities. Borrowers are required to provide evidence of their assets such as current RRSP or investment account statements, bank statements, real estate tax assessments for other properties owned and notice of assessments for individual tax returns.

Another factor that is important for approval is the credit bureau report for the guarantor(s). Generally, a credit score of 680 or more is considered satisfactory for financing purposes.
I have been a member of REIN since 2007 and I know that the ultimate goal for many members is to quit their day job and become full-time real estate investors; however, I should tell you that generally CMHC and mortgage lenders like to see that a borrower has income from full-time employment other than just their real estate holdings. It gives CMHC and the lender comfort that the borrower will have a steady income in the event of an unexpected economic downturn. More specifically, there will be regular income being received to pay the mortgage if the vacancy in the building should suddenly increase substantially.

This qualifying process might seem daunting for some but if you’ve teamed up with the right lender and expressed your future plans for the property the lender will evaluate the transaction and guide you through each step of the process so you don’t encounter any last minute surprises. There is great value in having a good relationship with a lender who is well acquainted with the approval process and who is an expert in multi-family financing. This lender can help you achieve your real estate goals by advising you during your transaction, leading you towards a quick approval, all while preventing you from making costly mistakes.

Abby McQuire is a Senior Manager in the Commercial Mortgage Lending section of First National Financial LP in Toronto. For more questions on commercial lending, contact her at abby.mcquire@firstnational.ca.