Clarification of CMHC’s Total Debt Service (TDS) Ratio Formula On February 16, 2010, CMHC announced changes to the treatment of rental income when calculating a borrower’s total debt service ratio (TDS) for mortgage loan insurance applications. The purpose of this note is to provide additional detail with respect to this calculation and the documentation that can be used to support rental income. Clarification of the Treatment of Rental Income from Residential Properties Effective April 19, 2010 CMHC’s TDS formula will change as follows:
PITH1 + Other Debt Borrower’s Gross Annual Income 1 PITH means principal, interest, property taxes and heat
If the subject property generates rental income, then: · 50% of gross rents can be included in the borrower’s income; and · T + H for the property generating rental income can be excluded.
If rental income from another property where the borrower resides is being used to support the application, then: · 50% of gross rents can be included in the borrower’s income; and · T + H for the property generating rental income can be excluded.
If the borrower has other non-owner occupied, rental income generating residential properties, then: · net rental income can be included in the borrower’s income; and · PITH for these properties can be excluded from the debt service costs. 50% of condominium fees must be included, when applicable. For chattel or leasehold loans, 100% of site or ground rents must be included.
Clarification of Net Rental Income Net rental income may be determined by using the borrower’s Canada Revenue Agency T776 Statement of Real Estate Rentals form as a guide for expenses. If the lender is using the net rental income from the borrower’s income tax return, the figure can be grossed up by 15% only if deductions have been taken to depreciate or amortize capital assets. The 15% gross up can also be applied to rental income if the borrower has taken self-employed deductions associated with the rental income that were not included in the Statement of Real Estate Rentals form such as business use of home or motor vehicle expenses, only if the income has not already been grossed up by 15% to offset the depreciation or amortization of capital assets.
Alternatively, the lender can use their own internal guidelines for determining the net rental income. Net rental income is to include gross rents less operating expenses and at least the interest portion of any loan payment that is secured by a mortgage on the property. Operating expenses should include factors for management expenses where applicable as well as vacancy and maintenance. Similar to CMHC’s guideline for self-employed income, Lender’s are required to use the average of the most recent 2 years net rental income to ensure the income level is stable. If the lender is confident that rental income is stable, the current net rental income can be used.
The TDS formula detailed in this note will apply to transactional and Portfolio applications for mortgage loan insurance at all loan to values, submitted to CMHC on or after April 19, 2010 for loans that will be funded on or after April 19, 2010. CMHC will consider exceptions to the requirements described in this note where the Approved Lender has documentation that the borrower has a legally binding purchase and sale, financing or refinancing agreement dated before April 19, 2010 and the closing date occurs on or after the effective date.