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May 2011 - House ownership is not for everyone .

House ownership is not for everyone .

☳ by Adam Aspilla

It is a common dream for everyone to buy a house. Buying a house is one of the biggest investments in one’s life. Thus, it takes time to buy a house for you need to have substantial amount of money for down payment, land transfer tax, legal fees, disbursements, and other related expenses.

You can buy a house with at least five percent down payment of the purchase price. This is what we call “high ratio” mortgage for you need a mortgage insurance to protect your lender in case you default on your payments. The premium is up to three percent of the mortgage amount. For example, if the mortgage amount was $100,000.00 you will pay a one-time premium of $3,000.00 ($100,000 x 3%) usually to be added to the mortgage amount.

However, if your down payment was at least twenty percent of the purchase price, mortgage insurance is not required. In the above example if your down payment was 20% you will save $3,000.00 insurance premium.

To minimize defaults on mortgage payments, banks allow up to 35% of the annual income of buyers for mortgage payments (Debt Service Ratio). If for example, the combine annual income of buyers (husband and wife) was $70,000.00, they can qualify to carry a mortgage amount where the annual mortgage payment is not more $24,500.00 ($70,000.00 x 35%) or $2,041.67 including property tax.

Buyers who carry a mortgage more than 35% of their annual income have greater risk of defaulting their mortgage payments.

One of the reasons homeowners default payments on their mortgages that lead to the issuance of Power of Sale and evictions is carrying a mortgage more than they can afford.In fact, some homeowners carry a mortgage up to 70% of their annual income. How? It is by providing inflated income to lenders to meet the 35% Debt Service Ratio.

This maybe a smart move in indirectly going around banks’ Debt Service Ratio requirement to get a mortgage approval and own a house, however, once you default your mortgage payments, power of sale will follow and you will lose your house.
When you lose your house through Power of Sale all you have paid for the house is forfeited. Like: your down payment, mortgage payments, property taxes, and renovations. 
Furthermore, in a Power of Sale, it would ruin your credit rating and you maybe required to pay for the shortfall, when proceeds of sale is not enough to pay the balance of your mortgage. It would take you years to re-establish your credit.

If you are planning to buy a house and you can meet banks’ Debt Service Ratio requirements without inflating your income and you have your own money for down payment not borrowed, buying a house is ideal for you, for a house is one of the best investments if you held on to it for a longer period of time, at least five years. It builds up equity.

House ownership is not for everyone though, if you cannot meet banks’ Debt Service Ratio requirement, postpone your plan to buy a house to avoid losing it at the end. Continue to rent, and save for bigger down payment. Your big down payment would help you meet banks’ requirements for mortgage approval, even if your income remains the same..

 

 

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.