Lifestyle | Big down payment, no house

Despite a down payment of $95,000, a young couple fails to obtain a sufficient mortgage loan to access the property. What to do ?

The situation

Samuel* wants to buy a first property with his wife, a goal for which the 26-year-old has already accumulated a down payment of $95,000.

Despite this substantial contribution, the financial institutions refuse to grant them a loan of more than $300,000. And again, they ask him for a deposit.

“However, there is no one around me who could do it,” he says.

With a loan capped at $300,000 and a down payment of $95,000, the price of the property cannot exceed $395,000.

“I live on the South Shore of Montreal and single-family homes sell for between $450,000 and $650,000 in my neighborhood,” says Samuel.

After a master’s degree in administration, the young professional entered the job market in January 2020 with a three-month internship, which was not extended in employment due to the pandemic.

He then found a job with a company that went bankrupt in October 2021. The following month, he was hired by the firm he has worked for since then.

“I was told that my employment history was not very good,” he says. They wouldn’t give me a loan too because I’ve never had a car loan or a student loan. I paid cash for my car and always paid my credit card in full each month. »

In short, he had the disadvantage of having managed his expenses wisely.

He currently earns a salary of $60,000.

Its budget shows an annual surplus of $18,800 on net revenues of $40,700.

His spouse, Myriam*, who is studying for another two years, earns $15,000 a year part-time. She pays for the couple’s food, electricity and internet.

Considering the $18,800 in his budget surplus and the $10,900 in current rent, Samuel estimates that he could devote nearly $30,000 a year to paying a mortgage.

“I find it hard to understand why I can’t get a loan, when my situation still looks good,” he protests.

” What should I do ? I thought of a few possible solutions, such as waiting another year or two to have more job stability and for my girlfriend to finish her studies, or taking out a car loan, for example, to improve my credit score. . Or buy a $250,000 house in the region. »

Apart from the fact that he should convince Myriam to move away from the South Shore, no doubt they would then have to buy a second car.

Samuel’s car, a 2007 model year bought second-hand in 2012, will it hold up for a while longer?

“I hope so,” he replies with a smile in his voice. I bought this car when I started college. I thought it would be good for five years, and miraculously I’ve had it for ten years and it still works. »

Financial institutions are surprised, too.

“One of them found it worrying that I didn’t have a car loan. They were taking away part of my borrowing capacity based on a car loan I might have. »

“I was always told that I had to accumulate savings, that I have a stable life, that I study,” he says. All these steps are done and it seems that for the institutions, it is still impossible. »

The answer

Samuel “is in a good financial situation,” notes Lucie Dal Molin, budget advisor at ACEF de l’Est de Montréal, an organization that offers budget consultations and home ownership courses.

However, “he said it himself, his employment situation is unstable,” she adds immediately. “I understand that financial institutions are a little cautious. »

Samuel talks about the possibility of taking out a loan which he “doesn’t necessarily need, just to improve [s]has a credit rating,” he says.

” Especially not ! “replies Lucie Dal Molin. “Why get in trouble? »

He otherwise plans to replace his car sooner.

“It could indeed show that he is repaying his loan well, but you don’t have to force yourself just to have a good credit report either. »

In any case, both for the credit file and for the regularity of employment, it will take many months of diligence to reassure the lenders somewhat.

The project also seems to hit the pitfall of household income, since a loan, even guaranteed by a surety, is capped at $300,000.

Let’s look at the situation according to the usual criteria of financial institutions.

“ATD ratios [amortissement total de la dette] and DBA [amortissement brut de la dette] must be calculated on the basis of a resistance test,” recalls Lucie Dal Molin.

Since 1^er June 2021, buyers’ ability to repay is assessed based on the greater of an interest rate of 5.25% and the rate negotiated with the lender, plus two percentage points.

Let’s set some parameters: gross income of $75,000, a down payment of $95,000, the prescribed interest rate of 5.25%, property taxes of $2,600 and heating costs of $1,800 per year.

With a property of $395,000 (therefore a loan of $300,000, uninsured because the down payment is greater than 20%), the ABD index reaches 34.5%, slightly above the ceiling of 32%.

Assuming monthly car loan payments of $350, the Total Debt Amortization Index (TDA) is 40.1%, just at the 40% limit.

The financial institution that limited the loan to $300,000 therefore appears to meet the Office of the Superintendent of Financial Institutions stress test criteria.

The real test

But any budget advisor will tell you, the real test is the budget.

“We must always base ourselves on net income,” advises Lucie Dal Molin.

“It’s important not to use all the money from the down payment. You have to plan a good $10,000 for the costs of the first year. This amount will be used for inspection, notary, moving and development costs, as well as transfer duties (welcome tax) and the adjustment of accounts already paid by the current owner.

It’s wise to also keep $5,000 in an emergency fund “for contingencies with the property, but also for day-to-day living,” adds the advisor.

In short, unless Sébastien and Myriam have other savings, the down payment would be more like $80,000.

Under these conditions, what place does their budget leave for a mortgage?

Home insurance will cost maybe $500 more than their current tenant insurance. It will probably take $1000 more per year for electricity. Let’s add $2600 in property taxes.

It would be wise to budget now for the payment of a new car, since it will probably be necessary to replace the indestructible 15-year-old car before long. Let’s spend $350 a month on it, for the purposes of our calculation.

The annual budget surplus of $18,800 is thus reduced to approximately $10,500, or $875 per month.

By adding the current rent of $910, the couple could therefore devote $1,785 to the monthly mortgage payment.

By approximating this monthly payment with a mortgage calculator, the prescribed rate of 5.25% over 25 years generates a loan of… $299,500.

Here then.

With a rate of 3%, the loan reaches $377,276 (this time including a loan insurance premium of $10,276), for a property that does not exceed $447,000.

Should the couple move away to pay less? “It depends on their life project, answers Lucie Dal Molin. Do they want to become owners at all costs, regardless of the consequences? »

In fact – and Samuel already suspects this – the simplest solution is obviously to wait another year or two.

“By then, his wife will have finished her studies and will have found a job. This will undoubtedly provide them with better income and a better ability to repay. »

Samuel will have shown more job stability and they will have increased their savings for the down payment.

“I didn’t give you very crisp information,” said Lucie Dal Molin. But that’s the reality. »

A reality open to the future, all the same.

* Although the case highlighted in this section is real, the first names used are fictitious.

Are you planning a project that requires a wise use of your money? Do you have financial problems?