Maynard is the sole owner of a high tech company, at the tender age of twenty-four.   The Company is doing quite well.  It has recently signed a multi-million dollar contract with a U.S. firm, and received a deposit against future earnings in the   seven figure bracket.  Although the Company's earnings are strong, Maynard, until this year, lived on a paltry $18,000 salary.  He was living at home so he did not require a large salary; he chose to put everything back into the Company.  Now Maynard wants to buy his dream home, so his annual salary just got raised to $120,000.   The price tag of the new home at $270,000 does not scare him, and the Company can afford to pay him the "retained earnings" the financial statements says it owes him.  He will received a cheque at the end of June for $80,000, which he plans on putting as the down payment.  His financial institution tried in vain to get the financing put together.  The rules for self-employed people got in the way.   Most lending sources, as you Sun readers know from this column, go by debt service ratios, to calculate affordability.  For self-employed individuals, the net taxable income is averaged out over three years, allowing for home ownership payments, inclusive of heat and property taxes, not to exceed 32% of that figure, that is called Gross Debt Service, or GDS for short.  Even if we include  Maynard's new salary, his three year average is only $52,000 (that's $18,000 for 1998 & 1999, and $120,000 for this year).  If we allow for a heating component of $1000 per year, and property taxes of $3400, his principal and interest payments (mortgage payments) must not exceed $1020 per month (that's $52,000 average income times 32%, less heat & taxes, divided by 12).   That amount of monthly payment will only support a total mortgage of $140,000 at a discounted rate of $7.35%.  Maynard needs $190,000 (that's the purchase price of $270,000 less the down payment of $80,000).  The mortgage payments (with heat and taxes) divided into the average salary above ends up being 40%; while divided into his new (real) salary, amounts to slightly over 17%.  All these numbers ended up being a nightmare for Maynard.  Although he truly can afford this venture, the system says that unless proven over the last three years, a new salary will not justify going over the edge, from a debt service aspect, although he has no other debt.  After fighting head office for three months, Maynard's loan officer called me for assistance. I listened to the story, interviewed Maynard, and arrived at a solution.

Because Maynard had no other debt, I asked his loan officer to grant him the mortgage at the lesser amount of $140,000, and to grant him a secured line of credit for the remainder ($50,000) at "prime" rate (currently 7%).  The secured line of credit would be calculated on the  Total Debt Service ratio (that's all debts payments, inclusive of house) which is allowed at 40% of his proven three year average income.  We would choose a term of three years instead of five, and at the end of that period, we would bring the two mortgages together, when we can prove three years of average income exceeds $120,000 yearly.  One cannot fault the loan officer who tried unsuccessfully to fight the system, to save Maynard some money.  In three years time, a new mortgage will be written necessitating new legal fees, and costs to amalgamate the two outstanding mortgages.  Maynard understands the system, and although still outraged at the complexity, will go along with our solution. There were other methods to solve the same problem, such as equity financing, or fringe lending.  Equity financing means going to a lender who does not care that the GDS is 40%.  This type of lender only cares that there is 25% of the purchase price, or more, going as down payment.  The interest rate is normally equivalent to the "bank's" posted rate, plus 3/4%. This type of lender may also charge fees.  Fringe lending is normally used to describe U.S. type lending institutions, who will allow for higher debt service ratios, as their lending "niche".  The interest rate for these types of lenders hover around 10%.  Understanding the system, and working within its parameters allowed us to solve Maynard's problem through conventional methods.

PART II

Although he truly can afford this venture, the system says that unless proven over the last three years, a new salary will not justify going over the edge, from a debt service aspect, although he has no other debt.  After fighting head office for three months, Maynard's loan officer called me for assistance.

I listened to the story, interviewed Maynard, and arrived at a solution. Because Maynard had no other debt, I asked his loan officer to grant him the mortgage at the lesser amount of $140,000, and to grant him a secured line of credit for the remainder ($50,000) at "prime" rate (currently 7%).  The secured line of credit would be calculated on the Total Debt Service ratio (that's all debts payments, inclusive of house) which is allowed at 40% of his proven three year average income.  We would choose a term of three years instead of five, and at the end of that period, we would bring the two mortgages together, when we can prove three years of average income exceeds $120,000 yearly.  One cannot fault the loan officer who tried unsuccessfully to fight the system, to save Maynard some money.  In three years time, a new mortgage will be written necessitating new legal fees, and costs to amalgamate the two outstanding mortgages.  Maynard understands the system, and although still outraged at the complexity, will go along with our solution.

There were other methods to solve the same problem, such as equity financing, or fringe lending.  Equity financing means going to a lender who does not care that the GDS is 40%.  This type of lender only cares that there is 25% of the purchase price, or more, going as down payment.  The interest rate is normally equivalent to the "bank's" posted rate, plus 3/4%. This type of lender may also charge fees.   Fringe lending is normally used to describe U.S. type lending institutions, who will allow for higher debt service ratios, as their lending "niche".  The interest rate for these types of lenders hover around 10%.  Understanding the system, and working within its parameters allowed us to solve Maynard's problem through conventional methods.