9.3 Underwriting, Debt Service Ratios & The Stress Test

Evaluate credit and the property together

Lenders assess the borrower’s willingness and ability to repay and the quality of the security. A useful framework is the five Cs: character (credit and repayment history), capacity (documented income and obligations), capital (equity and source of funds), collateral (accepted value and condition of the property) and conditions (the loan’s purpose, terms and relevant risks). A good score or a pre-approval does not settle the property review, final terms or insurance eligibility. For example, CMHC Purchase generally requires at least one borrower or guarantor to have a credit score of at least 600. That is a program criterion. A lender may require a stronger file.

Verify income, debt and down-payment sources through the lender’s process. A true gift has no repayment obligation and may need a gift letter and evidence of receipt. Borrowed down payment changes the liabilities and must be disclosed. The mortgage licensee or lender evaluates eligibility and the buyer’s documents. The real estate associate should coordinate deadlines and obtain instructions without collecting or forwarding unnecessary financial documents. The brokerage’s separate identity and anti-money-laundering obligations still apply.

Calculate GDS and TDS using the lender’s inputs

Gross debt service (GDS) is the housing cost used for underwriting divided by gross income. Total debt service (TDS) adds other debt payments to that housing cost before dividing by the same gross income. Express the result as a percentage and keep the units consistent. Monthly housing expense requires monthly gross income.

Under CMHC Purchase, use qualifying principal and interest, property taxes, heating, and applicable adjustments. Include the premium in the loan amount when it is financed. Include half of the condominium fee and, where applicable, all site or ground rent on a chattel or leasehold loan. Use actual heating costs where available or a reasonable property-specific estimate. For TDS add car and personal loan payments and qualifying revolving debt amounts. CMHC uses at least 3% of outstanding credit card and unsecured line balances per month. For a secured line it generally uses at least the payment on the balance over 25 years at the contract rate or applicable benchmark if unknown, subject to an equivalent lender method. Rental income treatment depends on the insured transaction and documented inputs.

CMHC Purchase generally uses ceilings of 39% GDS and 44% TDS. Check the applicable lender or insurer’s policy for another product. A result inside both limits leaves the other underwriting requirements to be verified. For a household budget, account for the full condominium fee and other actual costs, including insurance, maintenance and expenses the underwriting ratio leaves out.

Apply the qualifying rate to the right transaction

For most new uninsured residential mortgages at federally regulated lenders, OSFI’s minimum qualifying rate is the greater of 5.25% and the contract rate plus two percentage points as of November 2026. The contract rate still governs payments. The insured lending rules are a separate federal requirement and CMHC applies the same two numerical tests for the new purchase in its ordinary Purchase program. A higher contract rate can reduce the loan a borrower qualifies for even when income, down payment and the home remain the same.

Since November 21, 2024, OSFI has removed its prescribed minimum for a qualifying uninsured straight switch at renewal. The transfer must be between federally regulated institutions and involve a stand-alone, amortizing, non-readvanceable uninsured mortgage outside a combined loan plan. The remaining contractual amortization cannot increase. Up to $3,000 may be added for related transaction costs, with no equity withdrawal. The receiving lender still assesses repayment capacity. A cash-out refinance or longer amortization falls outside this exception.

A separate low-ratio portfolio-insurance rule applies to qualifying lender switches at renewal for applications from December 16, 2024. It covers loans of up to 80% LTV previously originated and stress-tested at a federally regulated institution. The borrower must maintain the contractual amortization, with up to $3,000 for transaction costs and no equity withdrawal. Other insurance eligibility rules still apply. The Canadian Mortgage Charter separately provides for switching lenders at renewal on an already insured mortgage without a new federal stress test. Ask the receiving lender whether the existing insurance can transfer and what underwriting it requires. A change of lender by itself establishes neither eligibility nor approval.

Test the value and funding gap

LTV is the base loan divided by the accepted value. Suppose an uninsured purchase lender lends at most 80% of the lower of price and appraised value in the stated transaction. The price is $500,000 and the lender accepts the $480,000 appraisal. Its maximum loan on that basis is 80% × $480,000 = $384,000. The buyer needs $116,000 to cover the price, plus any closing costs. Using $400,000 merely because it is 80% of price overstates the available loan by $16,000. If the appraisal or approval is outstanding near the financing deadline, review the signed condition and discuss seeking a written extension. Verify the required financing and notice before acting on the condition.

Work the numbers in the right order

A buyer seeks a new $400,000 uninsured mortgage from a federally regulated lender. The nominal contract rate is 4.90%, with semiannual compounding and a 25-year amortization. For this example the lender adopts the housing and revolving-credit inputs described above and compares the results with 39% and 44%. The buyer has $10,000 gross monthly income, $4,200 annual property tax, $120 monthly heating, $360 monthly condominium fees, a $450 car payment and a $5,000 credit card balance.

1. The qualifying rate is the higher of 5.25% and 4.90% + 2 percentage points, so use 6.90%.
2. The equivalent monthly rate is (1 + 0.069/2)^(1/6) − 1, about 0.566904%. Apply it over 300 payments to obtain $2,777.01 qualifying monthly principal and interest.
3. Add $350 tax, $120 heat and $180 for half the condo fee. The housing total is $3,427.01. Dividing by $10,000 gives 34.27% GDS.
4. Add $450 car debt and 3% × $5,000 = $150 for the credit card. The total is $4,027.01. Dividing by $10,000 gives 40.27% TDS.

The ratios are below the two assumed limits. Confirm the lender’s written decision, any conditions, loan amount, property review and deadline before the buyer relies on financing.