We have two stories to discuss this week.  Both John and Ted tried unsuccessfully to prove sufficient income to satisfy lending institutions that their respective mortgage applications made sense.
As you probably know by now, the mortgage qualification system in this country is based on a percentage of gross income.  These standards includes a calculation of the housing costs (principal & interest payment on the loan, including property taxes and heat) divided into gross income, as well as a calculation of overall payments (house and other debts) into gross income.  The first part is called "gross debt service ratio" or GDS, the second part being "total debt service ratio" or TDS.  Both these standards are calculated against income before tax.  The system will allow 32% of gross income to pay for housing costs under GDS, and up to 40% of gross income for all payments.  If you are a salaried worker earning $40,000 per year before tax, the system says you can afford $12,800 (that's $40,000 X 32%) for housing costs inclusive of taxes & heat, and $16,000 per year for all debts, including the house.  If you are not a salaried employee, sometimes the system is unfair.
John has been on a permanent disability pension for four years.  The amount of the pension is $1300 per month.  This pension is tax free.  He also receives CPP of $800 per month, which is taxable.  The total amount income therefore is roughly $2100 per month or $25200 per year.  John has owned his house for 15 years and has a mortgage of $75,000.  He also has credit card debts of $15,000.  He went to his bank of 15 years to apply for a consolidation mortgage of $90,000 at a promised rate of 6.95% or monthly payments of $628 for the mortgage, $150 for taxes and $60 for heat, totalling $838.  Since his income is net, and not gross, his banker simply multiplied the proposed housing costs by 12, totalling an annual outlay of $10056 (that's $838 X 12) and divided that amount into his income of $25200 to arrive at a GDS of 39.9%.  Since the system calls for a maximum of 30%, his application was denied.  He explained to the bank that his income was net and not gross, but to no avail.  He thought he would have to sell his home.
Our second similar situation involves Ted, an individual, who owns a small business.  This individual shows a gross annual income of $70,000 but because he gets to write off business related expenses, he only pays tax on $42,000.  These expenses are indeed legitimate, including depreciation of equipment, rent for the business, and entertainment expenses, but when it comes to qualifying for a mortgage, discrimination sets in.
He is looking to move into a bigger home in the west end of Ottawa to house his family and business.  He has sold his existing home netting $60,000.  The new home is $225000.  He requires a new mortgage of $165,000.  The new house has yearly expenses relating to property taxes of $2800 and gas heat of $900.  At today's mortgage rates (6.95%) his monthly mortgage payment will be $1150.  His banker, trying to fill the right boxes on the computer screen, arrives at a GDS of 42%, therefore the application was rejected.  Ted, who has sold his existing home, now sees himself out in the street.  He explains to his banker that the Company will pay rent of $800 per month and a portion of the heat and taxes, as it had done for the last 5 years, evidenced by the company's financial statement.  He was putting $60,000 down.  Again, same answer.  He did not fit the bank's approval profile, the GDS was too high.
In both cases, the computer profile rejected the applicants' application due to one dimensional thinking.  When I received these applications, common sense tells me that the deals have merit.  In John's case, I simply explained to my bank manager that his net income of $25200 annually was the same "take home" pay as an employee who earns $32,000, therefore the GDS was really 31%.  He had no other debts, after this consolidation, so his TDS was also 31%, he could afford this venture.  The deal was approved (at a better rate than his promised 6.95%).  He is moving all his RRSP's to the new Bank.
In Ted's case, using just 50% of  proven company rent as an offset against the new payment, I was able to convince a life insurance company to accept the theory that his monthly payment of $1150 was really only $750 (that's $1150 less ½ of company rent-$400 equals $750), which equates to a GDS of 31%.  In reality, once the Company pays $800 plus a portion of heat & light, Ted's real GDS will be less than 15% making this venture a breeze.  Yesterday, he was out on the street and yet he knew that the new payments were going to be far less than what he was paying for his present house.
Trying to convince a computer to think common sense is difficult at times.