Mortgages have come a long way in the last few years. You can space them out to 30 and 35 years, buy with no money in down payment and even hedge your bets on whether to buy a fixed or variable mortgage. Bottom line: now you don't need to save a big bundle before buying.
And it's easy to figure out if you're likely to be granted a mortgage. There are two measurements used to qualify you for a mortgage. The same measurements are used when you ask for any loan. The first is Gross Debt Service Ratio (GDSR), the second Total Debt Service Ratio (TDSR).
GDSR is simply the amount of money that your mortgage, taxes, half your condo fees (if applicable), and utilities will cost. Add these numbers up and if they equal less than 32 percent of your gross income, you qualify for a mortgage based on the value you used in the calculation.
TDSR is simply GDSR with your other debts added (credit cards, student and other loans, car payments, etc). This number needs to be less than 40 percent of your gross income.
What if your numbers just don't cut it? If your income isn't high enough to cover the property you want, consider some other ways to achieve your goal. This can be really important for lesbians and single women — owning your own property can be a vital hedge against deep poverty in retirement.
If you're over-extended because you let your spending get a little out of hand, why not try what a recent client of mine did? Jane (not her real name) had a bit of tidying up to do with her credit history. She was able to consolidate her debts into a loan, which she then started paying immediately. The payments increased Jane's credit score while the loan eliminated her old debts. She received credit for paying everything off and was able to qualify for a mortgage at the going rate within six months of taking the loan. Jane is now very comfortable in a three-bedroom townhouse with her two children.
If the payments on a traditional mortgage, which is amortized over 25 years, are out of your reach, then consider a 30- or 35-year mortgage. This will decrease your monthly payment; however, it will also increase the amount of interest you pay before the mortgage is paid off. Be aware that with traditional mortgages, you can often break even around the five-year mark if you decide to sell; however with longer amortization, this can take a few extra years. These same cautions belong to 0 percent down mortgages. It will take several years before you build enough equity to contemplate a possible sale.
Most of us have had roommates in the past. Why not consider buying with someone else? Double the income will make qualifying a lot easier. Just make sure it's someone you won't get tired of looking at for at least five years. Be sure to involve a lawyer in the agreement process to protect everyone's interests.
At today's interest rates, it takes a minimum of $582 per month for each $100,000 of mortgage (based on a 5 percent mortgage rate) — and there are condos available in this region for not a lot more than that. Still, if this amount isn't within your budget, then try sharing space with someone who is also looking to own. It could be a partner or simply a friend. Several couples I work with have bought property together. Sharing the expense of a property, including mortgage, taxes, utilities and maintenance is a lot easier on two incomes.
If you're just not in the mood to live with anyone else, another option is to look at rental income properties that have multiple units. You can live in one, while collecting rents to cover a large portion of the carrying costs for the whole property. With this option, you'll want to work with a real estate agent that has experience with these types of properties and can tell you just how much the carrying costs will be. You'll want to limit the number of units to ensure you qualify for a low down payment. (Note: This is a great option for the "handy" among us. Don't plan too many weekend getaways with this option, as you may be fixing leaky faucets.)
Fred (another client) decided on a completely different approach. He formed a "co-operative" of sorts where multiple buyers got together to share expenses and build equity. He was able to find three friends to enter into a partnership agreement. They share the mortgage and expenses of the four-unit building they purchased. Equity building is slow from each individual's standpoint; however it does happen over time. Because the property is owner-occupied, traditional mortgage rules apply. Their courtyard garden-home-style building is like something directly out of an Armistead Maupin novel.
When it comes time to get that mortgage, make sure to deal with a professional who will provide you with all the options. Variable mortgages often prove to save money in the long run, but if your cash flow is limited, fixed will provide you with more security. Options now include mortgages that are variable, with the option to lock in the rate (should rates start to increase). These varied options are best evaluated prior to your first renewal.
If owning a home is your goal, today's mortgage market accommodates almost every buyer. If you're ready to go home shopping, your best bet is pre-approval. This will eliminate the hassle and provide you with the confidence you need to find the right home.
Imagine handing your landlord your notice rather than yet another rent cheque.
Michael Bellefeuille is a financial consultant and the former advertising manager of Capital Xtra. The opinions expressed here are his own and are not intended as personalized advice.