We have a bar owner and his wife wanting to buy out a partner. They have a lovely ($450,000) home with a mortgage of $260,000. They need $75,000. Their reported combined income is a paltry $38,000. Their credit is only fair. Even the most generous bank will turn down this couple because of: a) not enough income; b) not good enough credit; c) a second mortgage behind a $260,000 first mortgage. They knew enough to come here first to get financing. The way our private lender looked at this deal is a little bit different than most institutional lenders. If we add the required funds ($75K) to the existing first mortgage, the total financing versus the value of the house is only 75% financing. If something goes wrong, the second mortgagee can probably sell the house for more than the existing financing thereby getting his/her money back. Because the borrowers can't go mainstream lending for the above reasons, the private lender can charge a premium rate (13%) and a fee of $3750 to lend the money. Expensive money, yes! But little choice!
Our second example is an existing homeowner wanting to draw equity against his principal dwelling in order to provide 25% down on an investment condominium garden home. The drawing of the equity is no problem but his bank has told him that the investment mortgage itself must be insured through Canada Mortgage and Housing (CMHC) and that CMHC has a rule that dictates that any condominium that is less than 65% owner occupied units won't fit their criteria. I could not believe that a bank today would give such wrong information. The client did some investigation on his own before calling me. He called CMHC to see if what he had been told by his lending agent was true. After hearing from CMHC, he called me to verify that CMHC had no such rule and that he wanted me to get him a mortgage elsewhere than at his bank for both the investment unit and his residence. I told him to cool his jets and relax. First off, to get a new lender to take over his existing mortgage would cost him several thousands of dollars of early pay out penalty money. Second of all, I had lenders who could do 75% financing on investment properties without CMHC. So the plan is now for me to approach his present lender to get an increase in his present mortgage in order to come up with 25% down on his new property, and finance 75% of the new property, without CMHC insurance. Both mortgages will be easy to arrange.
Our third case is a couple who used to work in the high tech sector before it was vogue. In 1992-1993 things got a little tenuous so they went to England, where work was readily available. In 1997 they came back to Canada, got jobs immediately, and started saving money. They went to several places looking for pre-approved mortgages, which were granted at three places. They were told they could go shopping for a house as long as they had 5% to put down and 1.5% of the purchase price in reserve to pay for closing costs. They had disclosed everything to all the lenders. They found their home. They had the down payment and the closing costs, so they looked at their pre-approval and chose a particular bank. They officially applied for the mortgage, bringing with them the Offer to Purchase, a copy of the Real Estate Listing, proof of the down payment, job letters and current pay stubs. They were promised very quick service (an answer in four hours). That four hours turned into four days, after which their loan's officer called back to say that since he had not been employed in Canada for two full years, and that his credit ratings from 1993 were poor, their application had been rejected. Not a problem, after all they had three of these pre-approvals. They were given assurances at the second place and the third place only to face up to the same story. When they entered my office, they were devastated. I called the Agent to see if the Vendor could help with Vendor-Take-Back financing. The answer was no. I then reconstructed the file to show that our couple had been in the high tech field since 1990 and that his present employer had guaranteed him work with increases for the next five years. I showed that they had lived up to their obligations and even though their credit ratings were poor in '92-'93, their current ratings were excellent. I then found a lender who would represent them to GE Capital (CMHC's competition) and the loan was approved with 10% down. I called our couple who could draw down a line of credit to come up with the missing amount of money. We declared the line of credit debt, and they are moving into their new home at the end of the month.
Our fourth case is the Contractor who has filed an income tax return every year but if you average them out over the last three years, his income has been $18,000 per year. He has been able to set aside $20,000 for a down payment. He wants to buy a small all brick home with some acreage. His plan is to improve the unit at cost and hopefully resell for a profit. He can't understand why the banks are turning him down. He is not a flake. He is finally starting to earn good money, and he is putting down $20,000 on a $110,000 property, but his average income of $18,000 per year is not enough to service the debt. His present income is enough (he draws $3500 per month), but since he works for himself, the bank will only look at tax assessment notices over the last three years, and calculate an average. We were able to get him equity financing to 70% ($77,000), coupled with a second mortgage of $13,000 which together with his down payment buys him the house. He feels that next year, with the improvements he has in mind, will be worth $160,000, so these additional costs and payments for equity lending and a second mortgage is worth his while.
Different situations call for different analysis and solutions.
Experience is the mainstay of creativity.