The boom in real estate hasn’t fizzled, contrary to what analysts have predicted. That’s the reality of living in this great urban sprawl called Greater Toronto Area.
Most homebuyers are encouraged by low mortgage rates offered by financial institutions, especially first-time buyers and those homeowners who want to upgrade to bigger ones.
Buying a house is a good investment for it generally builds equity. However, buying a house in other’s people name is a risky business.
There are three basic requirements to buy a house: first, a buyer must have savings of at least 5% of the purchase price of a house for down payment for a first time buyer plus closing cost (legal fees, land transfer tax and disbursements); second, a buyer must have a good income that meets the requirements (GDS and TDS ratios) of financial institution; and third, a buyer should have a good credit rating.
A buyer who meets all the three basic requirements could easily secure a mortgage with any bank or trust company at competitive interest rate, and she/he usually gets a cash-back (incentive for getting a mortgage) from the financial institution where the mortgage is taken.
For a buyer who does not meet one of the three basic requirements would experience difficulty in getting a mortgage. He/she may needs an acceptable co-signer to secure a mortgage. There is no cash back, and interest rate maybe higher than the prevailing rates in the market.
For a buyer who has only a minimum down payment and fails to meet the other two requirements, needs to spend a fortune to get a mortgage. Because of too much risk, only a private lender would give him/her a mortgage with high interest rate (two or more points higher than normal), in addition to lender’s fee or “bonus” and a healthy broker’s fee.
To avoid paying the exorbitant cost of getting a mortgage from private lenders, some buyers prefer to buy a house using friends or relatives names as buyers. A good illustration was a couple who came to me for an advice concerning the ownership of their house which they bought under the names of their three friends for their credit was bad and their income did not meet bank’s requirement.
Their three friends would like to get out from the ownership of the house that they do not own. However, the couple could not transfer the ownership of said house in their names, for their income and credit were still below standard. As a result, the three friends decided to sell the house for them to be out from the “fake ownership”. The house was sold at below market value for it was sold quickly.
The real owners (the invisible couple) did not able to prevent the sale of said house for legally they do not own said property and no control over it. Despite losing their house, the couple was still lucky for the proceeds of sale were given to them. It would have been worst if their friends pocketed the money.
Additional risk in buying a house in the name of other people include: friends or relatives whom you entrusted the ownership of your house may get a second mortgage or refinance the mortgage without you knowing it; and they maybe loaded with debts down the road resulting to Court Orders to garnish their assets that could include the house you entrusted to them.
If you could not buy a house in your name without paying excessive cost in arranging a mortgage, it would be much better to save more for your down payment while you are in the process of re-establishing your credit rating rather than buying a house in other people’s name and assume the risks above mentioned.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.