High Debt Ratio Loans

The high debt ratio loans have become popular in the mortgage business. It is especially good for people who have a steady income and available cash but do not have enough money for a large down payment, or for those who can afford the down payment but choose to spend less and keep more cash on hand. Conventional mortgages require a 20–25% down payment, as lenders traditionally will not loan more than 75%, but it is still possible to obtain high debt ratio loans if you don’t have enough to meet that requirement. Loans for high debt to income ratio allow people to buy a home with as little as a 5% down payment, but it comes with higher interest rates. In a conventional mortgage, a home costing $250,000 would require a down payment of $65,500 (or 25%). With a high debt to income ratio mortgage loan, the down payment can be as little as $12,500 (or 5%).  High ratio mortgages can be used for purposes other than a home mortgage, such as buying a car or consolidating debt.

The mortgage crisis of 2008 brought loans for high debt to income ratio into question, and it is now a requirement of most lenders for the borrower to purchase mortgage insurance.  The insurance protects the lender from default.  Mortgage insurance can be purchased through the Canada Mortgage and Housing Corporation  (CMHC). Originally created for first-time homeowners, CMHC insurance is now available to all qualifying buyers. A mortgage that is insured by the CMHC is guaranteed by the federal government. Genworth, also known as GE Capital Mortgage Insurance, is a privately owned company that also sells mortgage insurance. After questioning this practice when housing prices dropped and unemployment increased, making it difficult for people to pay their mortgages, Genworth recently decided to continue insuring mortgages.

The insurance companies can set maximum home purchase prices that may vary by province, and the loans come with certain qualifications. These include the following stipulations: the home you purchase must be your principal residence, you must have a minimum down payment of 5%, and you need proof that you can afford closing costs—which can run about 1.5% of purchase price. The insurance premiums depend on the purchase price and value of the home and can range from 0.6% to 2.75%. Insurance companies will have the property appraised and use the value to help determine the loan amount qualification. If the home you are looking to buy comes in at a low appraisal value, you may be disqualified for a large enough loan to meet your needs. Appraisal criteria include condition of the foundation and the surrounding neighborhoods.

While you will probably pay more interest on high debt ratio loans, it is a good option if you want to retain more of your cash. You can have the dream of owning your own home by making a smaller than traditional down payment and still have some disposable income. Knowing how much you can afford to pay monthly for a high debt to income ratio mortgage loan is important and figuring out your debt-to-income ratio will help.