Welcome back to the close more deals podcast. I'm your host, Scott Dillingham. Today, I'm gonna be talking to you about debt ratios. Now it's a boring topic, but the thing is is knowing some of the nuances with this can really help you to close more deals, have your clients acquire properties at much higher purchase prices, and just from a few little tweaks. So I think it's really important to understand these items.
Scott Dillingham:So let's let's go through them. So traditionally speaking, a bank will be at 44% debt to income ratios. So what that means is, you know, if a client makes a $100 a year, they'll let us use 44% of it for total debt payments. So that's mortgage, credit cards, lines of credit, like everything, to 50%. So from 44 k to 50 k a year can go towards these types of payments.
Scott Dillingham:Above that, it's yours for, you know, your living expenses kind of thing. So the thing is though, is that 44% debt to income ratio, it has different weightings or meanings at different lenders. So there's a bank, and I'm not gonna call them out on here, but there is a bank and there's multiple banks actually that take your credit card limits, and they use that and say that, you know, what if you max it out? Here's what your payments would look like. So let's just say you have $50 in debts.
Scott Dillingham:They're gonna require that we use 3% of that amount as a minimum payment. So that means we're using $1,500 against a client when we're using this bank because of how they process things. So, yeah, they'll go to 44 and so will their neighboring bank, but they've got this handicap here that they don't tell you about. It's not only credit cards and and lines of credit and stuff like that where they do this. Different banks have different policies on student debts.
Scott Dillingham:You know what they'll use, as a payment calculation, especially for student loans that are not in account. So if you're working with first time homebuyers, more than likely they do have student debt. Right? So working with lenders that optimize how they qualify you is a fantastic idea. But child tax benefit gets looked at differently.
Scott Dillingham:Maternity leave gets looked at differently for for each and every lender. Rental income gets looked at. Like, it's all different. Even self employed income, right, looks gets looked at completely different, lender by lender. So for you as a realtor, if you've ever ever had a client that went to their bank and the bank said their debt ratios are too high, give us a call.
Scott Dillingham:Don't even hesitate. You're gonna close more deals this way. I promise you because we know, and I used to work at a bank, I know the lender's limits. Each one has their own limits. It's not like anything is fantastic or special.
Scott Dillingham:It's just that they all have their own way. So if it doesn't work one way, we just try the other way, just like Thomas Edison in the light bulb. Right? Like, he kept trying different ways till he found the way that worked. And it's the same thing with mortgages.
Scott Dillingham:Just letting your client roam free and apply anywhere. Right? And if if the person they're seeing or the lender they're seeing has restrictions that don't work against their credit profile, it limits them. Okay? So now let's talk about the b lenders.
Scott Dillingham:So b lenders go from anywhere from 50% debt to income ratio to 60%. Now I did mention some of the banks will go to 50, but both of those fifties, whether it's a bank or a b lender, they're not equal. And here's what I mean. The the alternative lender or b lender, they're gonna use much more rental income. We can even use guarantor income with with the alternative lenders.
Scott Dillingham:So essentially what that means is we can have somebody on the application just using their income. They don't need to be registered to the mortgage. They're a guarantor as long as they live in the property. And we can use that income to help you to qualify. You can't do that on the aLending side without it attaching to your credit bureau and things like that.
Scott Dillingham:Right? It's it's much much more difficult. Not only that, they will factor in your actual payments. So they'll look at your credit card statements and your debts, your monthly payments that you have there. That's what they'll use instead of the 3% rule.
Scott Dillingham:Right? So that makes the debt ratios work better. So the way that they look at things is drastically different. For self employed people, right, they'll look at your bank statements and see your income coming in as opposed to using what's on your tax return like a bank would. You see what I mean?
Scott Dillingham:So there's many, many differences. So 50% debt ratios with the b lender still means much greater of an approval than with an a lender. Then, of course, there's private lenders who they don't really care about the debt to income ratio as long as there's a smart and solid exit. So for an example, say a client is purchasing a property and they wanna flip it, but it's in terrible condition. The banks won't even look at that if it's in terrible condition.
Scott Dillingham:So a private lender makes a lot of sense for that. Or say you have a client that lives in Alberta and they're moving to Ontario or vice versa. Right? And they haven't lined up a job yet. Well, if it makes sense and we can see that they're going to get a job and they've got good credit, we can get them this this loan without even having a job.
Scott Dillingham:Right? Because the story makes sense. So there's so many different options out there for your clients. I really hope this helps. But if you've ever heard that debt ratios are too high, then please give us a call right away.
Scott Dillingham:If you're hearing it from a broker, it's probably true and correct because we're looking at all of the lenders collectively. With the caveat, like if it's a new broker, they don't have access to all the programs. I've seen some inaccuracies with that. But traditionally speaking, brokers do get it. So give us a call.
Scott Dillingham:We'd love to help you to close more deals to increase your client's purchasing power, all the above. And obviously, if this episode added value, please share it, like it, follow us, all that good stuff. You know the drill. Thank you so much, and I'll see you next week.