Doug & Janice are living the Canadian dream. She has a licensed daycare centre & he got the golden handshake from the government. When he took his buyout, he paid off all his debts and had sufficient money left over to buy a home in the east end of Ottawa.

In the government, he was a welder. He went straight back to his trade as a sub-contractor for a welding firm. When they first moved into the home, 5 years ago, it was plenty big. Now, three kids later, it seems quite small. Time to move. First stop, the mortgage pre-approval centre attached to a builder just down the street. Doug was asked all the pertinent questions about income, down payment, and closing dates. Three hours after his interview, a congratulatory phone call from the approval centre, he could qualify for $190,000 worth of mortgage.

Next step, put in an offer to buy the new home, subject to selling the old home. They buy $240,000 worth of house, expecting to profit $50,000 from their present home. The offer gets accepted giving them 90 days to sell their present home. Next step, list house with a real estate agent referred to them by their neighbours. They receive an offer within weeks with a flexible closing date up to 5 months in the future. Perfect! Maybe too perfect....

Doug returns to the pre-approval centre with offer of new house in hand, along with the offer to buy their house, and a copy of their latest mortgage balance showing a $50,000 profit, which they will put as down payment. The mortgage officer also asked for the last 3 years of Revenue Canada tax assessment notices, to prove income. The mortgage officer looks at the pre-approval and suggests that there may be something wrong. In order to qualify, Doug & his wife would have to make a combined "taxable" income of $65,000. Doug said they do make $65,000 or even more. The Revenue Canada tax assessment notices show that after Doug & his wife write-off car payments, part of the home expenses, car operations, and repairs, the net taxable income is only $54,000, therefore they only qualify for $150,000 worth of mortgage. The pre-approval certificate was bases on information that Doug had given, and he remembers telling the mortgage officer that their incomes added up to $65,000, not knowing the difference between self-employed income and normal income. Even if their credit is impeccable, their debt service ratio sits at 38.9% of net income, while the maximum allowable is 32%.

Their house is sold unconditionally, they must move in 5 months. Where will they go? What happened to the dream?

The same neighbour who suggested the real estate agent asked them to call me. With $50,000 down, and good credit, I can get them a mortgage! We had to contend with high ratio financing. Remember that anything above 75% financing must go through a high ratio insurance company (such as Canada Mortgage & Housing Corp, CMHC for short, or GE Capital), right? Not always!

There are some fringe lenders who can get around the high ratio problem by self insuring the risk. At 79% financing, which is what Doug & Janice needed, with a little higher rate (7.89%) the deal gets done. Next week we’ll look at the same type of problem with not so clean credit.