No problem? Get it in writing...

This past week I've worked with two separate clients and in each case things where tight with their mortgage approvals. And both of these borrowers owned homes and where not first time home buyers.

In both cases each client was told that their financing would be "no problem" but weren't given anything in writing.  In both cases neither client understood how much equity they had available in their house.  This is always the first step in looking at home-financing, especially if you already own a house. 

Here's one scenario:

These borrowers where selling their home for $275,000 and wanted to move up to a $420,000 house.  They had two good incomes but last year they refinanced their home to consolidate debt so their current mortgage on their home was about $225,000.  When I took into account the real estate commission plus the legal and land transfer tax on the purchase of their new home of $420,000 there was barely 5% to put down on the purchase of $420,000. 

Up until now they had worked with their own bank and I recommended that they get something in writing from their bank regarding their pre-approval.  Their banker had previously recommended paying out some more debt from the equity in their home, but it was obvious through the first calculations that there would not be enough equity to pay out any debt.

When they finally did get an answer from their banker the bank told them they couldn't guarantee the pre-approval because "CMHC doesn't do pre-approvals".  This is absolutely true, but CMHC (the company that insures mortgages against default for banks - this is normally required if you have less than 20% as a down payment), their guidelines are clear.  They're even posted on the CMHC web site!  It was obvious after pulling their credit history that they wouldn't fall under some of the requirements of CMHC. Nonetheless through a little maneuvering I was able to get them a pre-approval, but this was not a mortgage pre-approval that was "no problem".

The moral of the story - work with someone who has the experience to help you.  Get it in writing.

Should you buy a house even if you have consumer debt or student loans to pay?

In the last week, I've see three clients in similar situations. All three clients had good paying jobs, where in their late 30's and had over $20,000 of consumer debt outside of traditional car loans. Should they be considering buying a home? Here's my opinion...if you have any comments on this topic, please share them on my blog!

A home is one of the only appreciating assets you'll own. The trouble with these particular clients is that they have kept waiting to pay off their debt and are now almost 40 years old and still do not own a home. My recommendation would be to review their family budget with them and find a monthly mortgage payment that will help them get into a house, while also developing a plan to pay down their debt.

If they had savings to put as a down payment they could also look at paying their debt down with their savings and getting a cashback mortgage, which gives them the money for the down payment. Remember that you can withdraw up to $25,000 from an RRSP the year you buy a home under the RRSP Home Buyer's Plan.  That money does not need to go to the down payment, it could go to paying off debt.  Now that's a good idea!