Overview and Tips on Getting Pre-approved for a Mortgage
My goal is to help you realize your dream of owning a home! This is a decision that requires a lot of research and insight, and I am here to provide you with the right tools to succeed.
This is Part 10 of an 11 part series that I will share with you weekly. If you want to read the previous step, please click here.
10. Explore partial ownership options
Let’s say you can come up with a down payment for your dream home, but your household income isn’t high enough to get the mortgage you need to take the next step. What can you do now? Well one other approach to home ownership is partial or joint ownership. This can take on a variety of different forms, including going in on a house with your friend or buying a home with your parents. Granted, this won’t always be a good fit for everyone. Some people like their privacy and a bit more space from the world, and other’s, while they might love their family, don’t necessarily need (want) to be living in the same house. However, for those who come from a close family, or have close friendships with people they would enjoy sharing a house with, this can be a really great option. If for example, you have a young family, going in on a home with your parents could be an option to not only afford a nicer home, but also get some convenient help from your parents with watching your kids. It can also be an easier way to care for your parents as they get older.
In terms of purchasing options, these remain relatively the same as discussed above, except that you’ll probably be looking for a single family detached house with at least two suites. The main difference becomes: what can you afford and what are the limitations of this approach? Affordability comes back to that TDS/GDS equation we discussed earlier. Effectively, a ratio that determines your capacity for home ownership by comparing the ratio between your income and expenses. As usual, let’s look at a couple of examples to get an idea of what this could look like. Let’s say you’re looking to buy a house in the Westshore communities for $1,053,625 with 20% down and you don’t have any debt. With a 2% interest rate your monthly mortgage would be $3,569.27. Using our formulas and some estimated expenses*, we can determine that in this scenario you would need $140,977.83 combined annual income to afford this property. If your current household income happens to be around that previously stated average of $62,900, then getting to that number alone could be a difficult hurdle. However, let’s say you want to buy a two suite home with your parents and they currently bring in a household income of $80,000. Together, you may easily exceed this requirement and get into the house of your dreams a lot sooner than buying a starter home and working your way up. Doing this, you’ll have the potential to gain more equity over time both because single family detached homes tend to outperform other products in the real estate market, and because any annual percentage increase in the value of your home will be applied against a higher number (i.e. +7% on a $400k condo would be +$28k, whereas, +7% on an $800k condo would be +$56k, twice as much!).
* GDS = (P + I + T + H) / INCOME -> INCOME = (P + I + T + H) / GDS -> INCOME = ($26,282.13 + $16,549.11 + $4,111 + $2,400) /35% -> INCOME = $140,977.83
Now, if this option sounds appealing to you, you’ll still want to consider some of the limitations and downsides before you dive in. The three most immediate factors to keep in mind are offer acceptance, equity sharing, and future plans. Regarding your offer, going in on a property with someone outside your immediate household can present a risk to sellers. As a seller, you are now no longer just selling to one person or one couple, but potentially many stakeholders. This means that if your offer has conditions (i.e. subject to financing, subject to inspection, etc.), these conditions have to be met and agreed to by all parties involved. The more decision makers there are, the higher the risk that an offer could collapse, potentially wasting the seller’s time and requiring them to put their property back on the market again. For this reason, unless your offer is the only one on the table, in order to be competitive, you’ll often need to be prepared to offer something else that other buyers aren’t. Typically the most attractive things you can offer will be money (i.e. a higher offer, or a larger deposit to show you’re serious), or flexibility on possession dates. If you don’t have flexibility on these options, then you’ll probably want to look for properties that have been sitting on the market for a while and aren’t getting much interest.
You’ll also want to keep in mind that the more people you’re planning to buy with, the higher the risk to sellers, not only because of an increase in stakeholders who could potentially collapse the deal, but also due to an increased risk to financing. The more people you have going in on a deal, the more fail points your group has with regard to supporting a mortgage. If for example, you have a couple who’s combined income is required to meet that 35% GDS threshold in order to safely afford their monthly mortgage; then the bank is financing a potential risk that perhaps one or both of you loses your job and you aren’t able to make your mortgage payments. However, if four people apply for a mortgage to finance a purchase and this larger group barely meets that 35% threshold the risk to the bank is greater. This is because now only one in four people needs to lose their job in order to potentially threaten the group’s ability to make mortgage payments. So if you are planning to go in-on a property with friends or family, keep in mind that from a financial perspective, fewer people is always better.
The other two factors to keep in mind are the potential impacts to your own equity and potential challenges if you want to sell down the road. Regarding equity, this might not matter as much if, for example, you’re buying a place with your parents, since you’ll be keeping it in the family. However, if you decide to go in on a property with some friends, you’ll want to keep in mind that any increase in property value and equity gained over time will have to be split by the number of people on the title of that property. This could be a good opportunity if the real estate market continues to appreciate in your area and you don’t expect to be able to afford nearly as much on your own for many years. However, if you are a year or two out from being able to get to a similar property on your own, then you may be better off waiting, or buying a starter home in the meantime. This type of decision is highly variable and will ultimately depend on your unique situation. The other thing to consider is that if/when you go to sell, having multiple owners of a property can present a unique challenge. You often see this with family members who inherit a property, three siblings might want to sell while the fourth wants to keep the place. If the family can’t come to a consensus, an impasse could set in preventing the other three from realizing their goals. This is something to consider prior to going in on a property with others. If you need to have the freedom and flexibility to sell your property in the future when the time is right for your personal goals, then this option might not be a good fit for you. This is especially true if your career requires you to move either on a deployment or for the purposes of career growth (i.e. Military, RCMP police officer, Pilot). It’s also true if you have a specific goal in mind (i.e. a plan to sell in 5 years and then buy something on your own). Even if you are all onboard for a specific goal or plan today, goals and priorities could change in the future. However, if you are all onboard to buy and hold a property as your forever home then this type of risk is a lot lower. You should also keep in mind that even though it’s usually possible to simply sell your equity share in a property, it is much harder to find a buyer for this very unique type of transaction and the value proposition to the buyer will typically be lower than a sole possession opportunity. This is because the same limitations mentioned above will typically devalue your offer such that you’ll receive less money for the sale of your share of the property than if you all decided to sell the property together to a sole buyer.
Stay tuned for the final part of our 11 Part Series!
I am a Victoria based local realtor with eXp Kiteke. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.