A poll reported on by Investment Executive, that serves as a baseline on Canadians’ financial literacy, found that only 41% of respondents claimed to be highly confident in financial matters. The finding suggests a disconnect between the financial literacy of Canadians and their confidence. Our stories this month highlight the things you should know that contribute to your overall financial and mortgage picture depending on different situations.
Government Employee
Kaya works for the Department of National Defence here in Ottawa and is looking to buy a $615K condo in the heart of downtown. Kaya’s income is quite straightforward as a public servant. She has a full salary of $135K annually and her position is indeterminate (in other words, full-time and permanent). Kaya has a car loan of $575/month, and roughly $20K in unsecured debt (line of credit, credit cards, etc.). She also has excellent credit with a score in the high 800s and a 20% down payment.
Kaya’s challenge is not whether she qualifies (that should be no problem!) but is how much down payment to use to pay off debt versus putting towards the down payment on the home. Ultimately, her decision was to put down the 20% because her car is leased, so buying it out didn’t make sense, and she was expecting money in the future to pay down her unsecured credit. In this case, moving forward with 20% was the best move and got Kaya a fantastic deal with a great rate through one of our A lenders.
EMT & Contractor Couple
Sophie and Max are a young couple with two children. Sophie is a full-time EMT with guaranteed hours and a $78K salary. Max is a newly self-employed contractor who’s worked in the construction industry for more than 10 years but always as an employee. Now that he’s self-employed he has no salary or guaranteed hours. Sophie and Max are selling their existing home to buy their next one. The proceeds from that sale will eliminate all of their unsecured debt leaving them with just a car payment of $700/month.
Since both of them have excellent credit, this will not be an issue with their application and neither will 20% as a down payment. Sophie and Max’s main challenge arises from Max’s decision to start his own business. With less than two years in business, most lenders will not count his income unfortunately. With this in mind, we need to focus on Sophie’s income for the deal to work. The solutions for this couple will either lie with an alternative lender or a co-signer.
Pro-tip: Alternative lending is only an option at 20% down. There really is no alternative lending with less than 20% down unless it’s a private lender. (way more expensive).
An alternative lender would consider Max’s history in the industry as a marker for what income he’s capable of making or look at the revenues he’s already generated as potential gross income (via bank statements and invoices for at least six months). The other option will be to have someone co-sign on their deal who effectively would be replacing Max’s income.
We discussed these options and weighed the financial benefits to both situations. They opted to go with a short-term two-year mortgage with an alternative lender for a slightly higher interest rate. After two more tax years, they will be able to move from the alternative lending space to the regular one with Max’s income being able to be a contributor.
Business Owner
Isla is a local entrepreneur with multiple corporations that she owns and operates. Isla runs her corporations with the primary goal of tax efficiency. She makes a decent income on paper, between $70K-$75K annually, and has an ideal credit score that’s over 800 with no consumer debt whatsoever. The mortgage Isla wanted was more than she could qualify for with her current income however.
Isla didn’t want to wait the additional time we typically recommend for our business for self (BFS) clients in order to record a higher income on paper. With the businesses showing revenues substantially more than what she was taking home as a salary though, we would be able to show the availability of more funds and cash flow to our lenders in order to mitigate risk. Programs involving bank statements for the business itself, as opposed to personal bank statements, are reserved for the alternative lending space.
Alternative lenders typically charge slightly higher interest rates (0.5%-1% higher than the market) along with a nominal 1% fee on the mortgage loan amount. Financially speaking, in Isla’s case, it made more sense to go with an alternative lender at the slightly higher rate and fee than paying herself a higher income and thus more income tax. We were able to set Isla up with one of our preferred alternative lenders and she was able to buy the home she wanted!
Government & Server Couple
Andrea and Cosima are another young couple living in Ottawa. Andrea was recently hired into a full-time position with the federal government and Cosima is a full-time server at a local restaurant as well as a part-time volunteer firefighter. Their situations complemented each other nicely since Andrea had a higher and more consistent income and Cosima had better credit albeit with a lower income. Their combined household income was just over the six figure mark.
We know Cosima makes more than she claims as a server through tips but we can only use what’s shown on the tax returns. They had enough savings for the minimum down payment and closing costs. They didn’t have a lot of debt but the debt they did have was holding them back due to Cosima’s lower income and some past credit issues. Cosima had a line of credit of $17K, the payment on which we had to calculate at 3% of the balance, so $510/month. Due to their credit scores being less than 680, we were very limited on their purchase budget based on our lending ratios.
Without increasing their downpayment, we worked with them to focus on paying down the credit line, gave them tips on how to manage credit to increase their scores, and even suggested claim more income from Cosima’s tips on their taxes. They also decided to move back in with their parents for a brief period of time to help with saving and debt payments. Instead of buying at the time they first came to us (which would’ve resulted in a lesser home than they wanted), they moved forward with our financial advice and 8 months later were able to purchase their dream home!
Contact the Kyle Miller Mortgage Agent team to learn more about our solutions and have the financial side of buying a home demystified. We take the time to understand your situation, explain all the different pieces of the puzzle, and provide you with the best mortgage options!
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