Nancy wants a future for herself and her daughter, but the system
just got in her way. She received a final settlement of $45,000 from
her ex-husband. She wants to invest this money where it will do her
most good. She likes the idea of real estate. A duplex offers
a roof over her head, and a tenant to help defray costs.
She find the perfect unit in Vanier. Presently listed, the Agent
assures her that $150,000 will take it. She is presently paying almost
$800 per month rent, and the lower apartment in this unit is rented at
$750 per month, if she were to put down $40,000, the total carrying costs
for the mortgage, taxes, heat & light, will be $1157 per month.
She is thrilled to death at her good fortune. Not wanting egg all
over her face though, she decides to approach her Bank to get pre-qualified
for a mortgage of $110,000.
After waiting for three days, her bank manager says she doesn't qualify.
She does not understand. She explains to him that this venture will
be cheaper than what she pays out right now.
He says that the bank must add the present rental income to her gross
income ($750/mo X 12 months = $9,000 plus $28,000 salary = $37,000 total
income), then allow only 30% of that amount for payments of principal,
interest and property taxes. Given that the taxes are $2500 per year,
that leaves $8600 per year to carry the debt. At 6.95%, the payment
of $716 (that's $8600 divided by 12 months) amortized over 25 years will
only support $102,600 worth of mortgage. If she buys for $150,000,
she needs $47,400 down. Discouraged, she calls me for advice.
I had her drop by the office to talk. Her calculation of cashflow
made sense to me and her determination to be self-sufficient was wonderful.
-2-
Wanting to put $40,000 down, I knew there was a deal here, all we had
to do is convince a lender not to use the everyday rules, surely they could
stretch. We made a formal presentation to her bank manager, explaining
that using only 2/3 of the rent ($500 per month) as a rental offset against
the mortgage payment would certainly change the GDS (gross debt service
ratio) to acceptable guidelines. The numbers looked like this:
$110,000 mortgage @ 6.95% over 25 years $767.06
plus property taxes 210.00
plus heating (budget plan) 180.00
less rental offset -$500.00
equals payment by Nancy $657.06
That payment divided into her gross monthly income represents 28% of
her income and happens to be $143 per month less than what she is paying
right now. We have not used all of the rental income, nor have we
used the monthly heating component that the tenant will be paying.
She has no other debts to drain her cashflow, and her credit since her
separation (five years) has been perfect. With her down payment of
$40,000, the loan of $110,000 represents only 73% of the property's value,
and she has $5,000 left over to pay for closing costs.
The next day, her bank manager told her to make the offer, the deal
was approved. Determination, a little common sense and the proper
paperwork works. Nancy can now get along with her independent life.