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For those people who feel they can offer to buy a dwelling without having a firm sale
on their present residence------ beware! Since Real Estate is "hot", you
may feel you would have no problem in selling your existing home, but...............
If you have a mortgage in your present property, normal lending institutions will not
approve the mortgage on your new dwelling until your old house is sold. Some lending
institutions will approve the new mortgage, however, not the rate of interest until the
old house sells. Still other lending institutions will approve the mortgage and the
rate however, they will take into consideration both the payments on the old as well as
the new mortgage within your debt service ratios; if you can't prove you can afford both
houses, the mortgage will be declined.
Where possible, make your offer conditional upon selling your home within a certain time
frame (60-90 days). I would strongly recommend you sell your old house through an
aggressive real estate agent and not by yourself. The Real Estate Companies have
proven over and over again their superiority in marketing. Discuss with your Realtor
the advantages of buying down the mortgage rate (decreasing the rate) for the
potential buyer, if your present rate is higher than the market rate, or offering to pay
for closing costs to any potential purchaser. The greater the panic to sell, the
more goodies you should offer. It is amazing how many people would buy a home, if
the Vendor were to pay for a new survey and legal fees. Vendors are not supposed to
be involved in the purchasers' down payment, however there is nothing to prevent Vendors
from participating in lower mortgage rates or lower costing legal fees. Some Vendors may
also be in a position to "take back secondary financing" which could save the
CMHC high ratio premiums.
For those of you who feel you must buy without first selling the existing home, I
always advise to be ready to rent the present dwelling and prepare for an equity take-out
loan to the maximum carrying power of the rental income. As an example, your home is
presently listed for $165,000. You present mortgage is $50,000. In case you
can't sell, you should be able to rent for $1200 per month. After paying for
property taxes, and insurance, that rental income should pay for $120,000 worth of
mortgage. Since you only owe $50,000, you should be able to borrow an additional $70,000
without it costing you anything (no increase in cashflow). You can now apply this
$70,000 towards the down payment on the new house. Most lenders will go along with a
proven rental (lease).
If the new property is being purchased for $240,000, as an example, this would allow you
to shop for a conventional mortgage (no CMHC fees) of $170,000. You should to take a
mortgage term that will coincide with be leased property. In other words, if your
renter was prepared to rent for three years, you should also take a three-year term
on your new residence mortgage. If your renter is only prepared to rent for one
year, you also should take a one-year term mortgage. It is still far advisable
to sell your present dwelling before you buy the new house, however if this is not
possible, the above should give you an indication of what is possible within the
acceptable practices of various lending institutions.
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