Your rainy day funds may hold the key to mortgage approval

The 80/20 rule is alive and well in the land of mortgages. Roughly 80% of successful applicants qualify based on having enough income to cover their housing and other debts while the remaining 20% have modest reported income and instead qualify because they have liquid assets at their disposal in lieu of income.

Let's explore how fictional client Jeremy got approved using the funds he set aside for a rainy day.

Jeremy is a self-employed millennial, and also very smart. He's been scanning realtor.ca diligently for the past 6 months and pounced on a power-of-sale condo in North York, a rare find. But when I crunch the numbers, even after making his desired down payment of 35%, his debt service levels are still too high.

His Total Debt Servicing -- or percentage of income that pays for housing and other debts such as car loans and credit cards -- is 85%. Banks prefer the TDS to be 40% or lower.

Often, an out-of-whack debt servicing level can mean the end of an otherwise promising mortgage application. But, in Jeremy's case, he's got an ace up his sleeve in the form of liquid assets above and beyond his down payment.

How Jeremy's rainy day fund will get him approved

The standard way to get approved for a mortgage is to have a strong credit rating and enough income to easily cover the debt servicing of the mortgage, taxes, condo fees, heating and any other debts.

From the bank's perspective, Jeremy is an ideal candidate to qualify based on assets rather than income. He is currently renting and owns no other properties. The condo he is buying will be his principal residence. His T1 General shows an income of $50,000. Even better, after the downpayment he will have an $85,000 rainy day fund. His liquid assets will break down as follows:

• TFSA of $40,000
• Cash in a bank account of $15,000
• GIC of $30,000

Since these assets have been held for more than 90 days, from the bank's perspective they are part of Jeremy's tangible net worth.

Based on one bank's rainy day fund qualification criteria, Jeremy is well positioned to qualify for a mortgage if he has a good credit score plus substantial liquid assets. The calculation is as follows:

• Mortgage amount x 0.0065 x 36 months

Since Jeremy is requesting a $350,000 mortgage, the calculation is as follows:

$350,000 x 0.0065 x 36 = $81,900 He will require $81,900 in liquid assets in order to qualify for the mortgage. His rainy day fund of $85,000 means approval is a near certainty.

Other options

Given his strong financial position, Jeremy could use some or all of his $85,000 rainy day fund to do one or both of the following:

• Pay down current debt to get his debt service levels in line
• increase his down payment

However, he's happy leaving his rainy day fund intact, just in case.

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Susan Williams is a Mortgage Development Manager with National Bank of Canada.
Email: susan.williams@nbc.ca Twitter: @YMJourney