Gerry is all smiles now.
When Shauna and Gerry called me, they were paying almost $2000/mo rent + utilities and desperately wanted to buy their own home and quit paying rent, but just couldn't seem to get on track for a mortgage approval. Now they are interviewing prospective tenants.
When Gerry and Shauna called, they were having trouble mortgage qualifying.
Here's what they were up against:
- Their jobs paid relatively modest incomes, combined at $60K/yr, and only enough for rent, food, a small vehicle loan, and the few bills they had.
- With rent so high, they certainly weren't making enough to accumulate the required 5% minimum down payment for a home.
- Even if they could come up with down payment, the value of home they could qualify to buy wouldn't amount to much in their city, where property prices for anything half-way decent were much higher.
Suggestion: buying a home with a rental suite might be easier
A suggestion I made was to consider purchasing a home with a legal rental suite and ask their parents to temporarily "gift" them the down payment they required. They would flip the table and become a landlord, with their tenant helping to pay their mortgage instead. Here's what I was exploring and how they explained it to their parents:
- First of all, it is important to understand that a 'legal' rental suite is one where there is a secondary suite permit, meaning the city by-laws have approved the property for a tenant to occupy part of the property, say a basement apartment.
- With a legal suite in Canada, the rental income it can generate can be added to Shauna and Gerry's income allowing them to qualify for a more expensive home.
- With a tenant paying them rent instead, that money could then be used to re-pay the gifted down payment from mom and dad, in case they really needed the money back (they did).
- I also advised them that with this ownership strategy, the home didn't have to be their forever home, just a stepping stone on the property ladder.
- When they want to upgrade, they could simply keep this property and buy the next one still with a minimum 5% down payment, or sell it and use the equity for a bigger down payment for next.
Finally, Shauna and Gerry could see a way to get into home ownership sooner rather than later. They could successfully become first time home buyers! They could finally quit paying rent and buy their own home.
Here's how the math and story worked out.
- They found a cute little 1955 bi-level with a fully legal and compliant 1 bedroom basement apartment, that would rent for $1000/mo including utilities.
- In addition to their monthly employment income, we were able to add the projected $1000/mo rent to their income and the home they could qualify to purchase went from $315K to $390K !
- The home price they negotiated was $370,000, so well within the new range of pricing.
- Their parents "gifted" them $15K towards the purchase and they had the other $3.5K needed to get to 5% down plus a little more for their lawyer and other 'closing costs.'
- The mortgage payment was ~$1670/mo, property taxes where about $250/mo and fire insurance was $100/mo, so $2020 in all, almost same as rent before....
- BUT now they had $1000/mo coming in as rent that they never had before and their plan is to repay mom and dad ASAP (plus make them a nice dinner) for helping them out.
As it relates to buying your first home, sometime is just takes a little planning to find the pieces to the puzzle that will work for you. Parents will often help their kids out, especially if there is a coherent plan. We'd be happy to help you plan a way to your first home purchase. Just contact us and let us know how we can help.