Real Estate

Bank pre approved me for an amount that I might not be able to afford?

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  • Sep 22nd, 2017 6:47 am
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Aug 28, 2014
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Bank pre approved me for an amount that I might not be able to afford?

Here's the deal, back in June I went to scotia and got pre-approved for a mortgage of $311k + down payment. I'm not sure what method they used to figure out what I could afford, because now I'm interested in a property that's just at my limit and a mortgage broker that works with my realtor is telling me that the max I can afford including 10% down is 295-300k. This is a huge discrepancy and the recent rate increase isn't enough to account for the difference. I didn't bother doing a detailed breakdown of monthly costs before because I figured the bank + new rules would ensure that I could afford it, but now I am starting to get worried.

My take home pay can vary a lot but is usually around 3900 a month. My expenses over the last year have averaged to 1305 a month (student loan, auto insurance, food, fuel etc). With the current rates/ impending future rates, do you guys think I should even try to take out a mortgage of around 300k? Also what would be the carrying costs of an old old detached house, about 1000sqft?

Another kicker is that I'm a full time temporary employee with no end date and it will be only 1 year of employment at end of september so I'm not sure if anyone other than scotia will even give me a mortgage. Could the bank have screwed up and given me a pre-approval for an amount that actually wouldn't go through when I submit the real paperwork?
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Nov 2, 2013
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Different lenders have differing methods of calculating income. The general formula is 40% of monthly gross income (44% or so for excellent credit) allocated for debt servicing, minus half of property taxes, condo fees, and utilities. Then whatever mortgage payment room you have left, is based on a 4.84% rate, not the actual rate. They call it the "stress test" rate to try to future-proof you from rate increases.

Pre-approval isn't an actual approval; it's just a loose approximation on how much home you can mortgage, so you at least have a rough range to shop in.

From your 3900/mo. NET estimate, sounds like you make $62K gross over the year or so... gives you about $2067/mo. or so for your debt payments and half of condo fees, property taxes, and utilities. Your bank is telling you about $310K mortgage room, so that's pretty accurate, as it's a $1754 mortgage payment based on 4.84% stress test rate, and leaves you about 626$ between utilities, condo fees, and property taxes. This is provided you have 0 other debts.

EDIT: DIdn't realize you mentioned student loans, so it's really 626 between the student loan payment, and 1/2 of utilities, condo fees, property tax.

Perhaps your realtor is telling you that due to a certain home you're looking at that has a higher tax bill, utilities and/or condo fee in the equation?

If you're a full time temporary employee, your approval hinges on your employment letter listing you as a permanent, non-probation full-time employee. They will give you grief if your paystubs are inconsistent- which it sounds like is the case... If that's the case, or the letter defines your employment as seasonal/contract/temporary... then the lenders will take the incomes displayed on the last 2 tax returns, and average them- to calculate your qualifying income.

Affordability depends on you. Some people live so cheap that they'd wipe their ass with the Pizza Hut napkins and line up at Costco for 30 minutes just to get fuel at 2 cents less per litre. Some live like kings and must lease the newest BMWs, buy VOSS water bottles, and eat nice steaks every weekend. Though at first glance, 3900 - 1305 - 2067 = 528. You can make it work, but not with much breathing room - though many people are happy just to save even less than 1/2 of that. Personally I don't like saving <1000/month, as a sudden expense like the car breaking can easily be hundreds to a thousand plus. But when I lived in Vancouver, given most people there are happy to take home maybe 2500/month - they're happy to save even 250/month. I used to work with a guy who took home around 6000/month but he'd brag to all of us about his financial planner helping him save and compound 400/month into some fund that then would let him become a millionaire at retirement, after like 35 years... Does this make you happy?
Last edited by FirstGear on Sep 19th, 2017 7:57 pm, edited 9 times in total.
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Nov 8, 2016
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Your monthly mortgage would probably be 1500-2000. I give this as an theoretical absolute minimum and maximum. Plus your 1300 it totals to a approx 3300 (let's take the max number). 600$ I something I wouldn't rely on. There will be that BBQ and that birthday and Christmas... So many variables for 600$. Even if you take the minimum expenses you'll be left with 1k and that's ok but you never know what's gonna happen.
ON the other side your kicker just screams NOOOOOO!
My bro tip would be just keep calm, find a girl/boy and figure it out from there it's not worth it nowadays buying a home by yourself.
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zconiglietti wrote:
My bro tip would be just keep calm, find a girl/boy and figure it out from there it's not worth it nowadays buying a home by yourself.
That can be either really good or bad... good if you two have a similar financial mindset and are compromising.... bad if you two do not... money is one of those make or break things- one of the leading causes of divorce as there are so many ways to fight about it, or you two can combine forces to grow... I've always been in the older school of thought and don't like poking the beehive... lol
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Sorry I should've provided more details.

The estimated tax of the property I am looking at is around 2900 a year. It's an old old house that needs updating and new appliances. My savings would pretty much be relegated to fixing the place and saving for appliances. Also I would have to spend cash right away to replace the oil furnace with a gas furnace and a new line installed, this is making me nervous. I can pull OT shifts now and then which increases my monthly to 4500, but nothing is guaranteed.

So from what you guys are saying, I was probably right in thinking I would be living from cheque to cheque when I ran the numbers this morning.

My other options are townhouses/ condos around 300k -10% down, but they have maintenance fees around 300-350 which sounds like they would just land me in the same situation. I'm worried that the market might correct and decrease the values of these old undesirable houses, leaving me worse off than if I had just put the money towards a bigger down payment. It seems kind of stupid that even at these low rates almost 50% of my mortgage payments will go purely to interest.
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just because they approve you for $311k, doesn't mean you have to purchase at that price. You may need to look further outside the GTA for something a bit cheaper for now. Since you are only putting 10% down, you'll have CMHC fees as well ($10-12k)
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nabiul wrote: Sorry I should've provided more details.

The estimated tax of the property I am looking at is around 2900 a year. It's an old old house that needs updating and new appliances. My savings would pretty much be relegated to fixing the place and saving for appliances. Also I would have to spend cash right away to replace the oil furnace with a gas furnace and a new line installed, this is making me nervous. I can pull OT shifts now and then which increases my monthly to 4500, but nothing is guaranteed.

So from what you guys are saying, I was probably right in thinking I would be living from cheque to cheque when I ran the numbers this morning.

My other options are townhouses/ condos around 300k -10% down, but they have maintenance fees around 300-350 which sounds like they would just land me in the same situation. I'm worried that the market might correct and decrease the values of these old undesirable houses, leaving me worse off than if I had just put the money towards a bigger down payment. It seems kind of stupid that even at these low rates almost 50% of my mortgage payments will go purely to interest.
If your OT is not guaranteed, and your last 2 tax returns displayed lacklustre incomes, what the lenders will often do is take your hourly rate x 40 x 52 to determine your "yearly income" - based on your letter of employment. You may be in a nasty surprise if you're heavily dependent on OT. Back in the day I sure got an awakening when though I made $9-10K in a good month at one particular seasonal job, because my hourly rate was really $25/hour, they went $25(40 hrs/week)(52 weeks) = $52,000/year... Of course I went WTF?? I did not make $52K/yr. But any irregular income has to have a 2 tax-year history for mortgages to be useable, so that extra OT you opt to do will take 2 full tax years to take full effect... that is if you're able to keep doing it for the remainder of this year and next.

Banks do not like piece rate, incentive-pay, high but volatile pay, business, or investment income... It sucks as we know no risk = no return... and that's why you're probably in a OT job. Most people in finance (especially personal and commercial banking side) demonize risk... and that's why they still work there...

The townhouses you're quoting sound like they're at least a few years old, so that's pretty accurate. When well-managed they're alright, as exterior repairs would then come from the reserve fund they build up, and you don't have to pay separately for your lawn care, snow removal, exterior insurance, etc... in a detached, these expenses would be incurred on your own. The drawback is 50% of strata fees are part of your "debt servicing" allowance.

The other concern about that house would be maintenance. Most people cry about condo fees as rationale for buying a detached, but you will pay for every repair and upkeep. Given the usual much more surface area to cover, they can often be even more expensive (e.g. $5-10K for a roof, few thousand for the entire fence, etc...)

If you're worried about interest, you'd have to weigh in the cost of the alternative: continued renting and lost principal contributions and appreciation, VS. paying that interest, but gaining principal contributions and appreciation. If you rent out this home in the future, you can at least write off the interest, as it is tax deductible if incurred to earn a taxable rental and capital gains income. Also, once you move in, if you're strapped for cash, you can rent out a room(s) for extra cash.
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nabiul wrote:

Another kicker is that I'm a full time temporary employee with no end date and it will be only 1 year of employment at end of september so I'm not sure if anyone other than scotia will even give me a mortgage. Could the bank have screwed up and given me a pre-approval for an amount that actually wouldn't go through when I submit the real paperwork?
I've been in same position while refinancing my motrgage :)
What works for me - letter from HR about position, title, salary and stating you're NOT on probation (definitely not after 1y lol). Aks them do NOT emphasize it's a temporary position (not a big difference as anyone could be fired anytime, but banks are spooked by "temporary" wording)

Bank will take this as proof of income, especially with "stable" paystubs

300k on 25y will be 1400 real and 1700 qualification monthly. While your real payment (mortgage+taxes+loan) seems to be quite ok (under 2000), it could not pass stress test however. I'd be prepared to have 20-30k extra downpayment or lower price, and for sure have finance condition on purchase

with actual 1300 expenses +1700 (mgt+tax) you'd have 900 left...doable if you do not have kids and other kind of unexpected :) expenses
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What is your rush to buy something? There's no shame in renting, and it provides a great deal of flexibility to move if you need to for work. Your job isn't secure from the sounds of it. I would not be comfortable taking on a debt like that by myself without very secure employment. You don't sound ready to be getting into this to be honest.
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Pay off your osap first and save at least 20% down payment.
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nabiul wrote: Here's the deal, back in June I went to scotia and got pre-approved for a mortgage of $311k + down payment. I'm not sure what method they used to figure out what I could afford, because now I'm interested in a property that's just at my limit and a mortgage broker that works with my realtor is telling me that the max I can afford including 10% down is 295-300k. This is a huge discrepancy and the recent rate increase isn't enough to account for the difference. I didn't bother doing a detailed breakdown of monthly costs before because I figured the bank + new rules would ensure that I could afford it, but now I am starting to get worried.

My take home pay can vary a lot but is usually around 3900 a month. My expenses over the last year have averaged to 1305 a month (student loan, auto insurance, food, fuel etc). With the current rates/ impending future rates, do you guys think I should even try to take out a mortgage of around 300k? Also what would be the carrying costs of an old old detached house, about 1000sqft?

Another kicker is that I'm a full time temporary employee with no end date and it will be only 1 year of employment at end of september so I'm not sure if anyone other than scotia will even give me a mortgage. Could the bank have screwed up and given me a pre-approval for an amount that actually wouldn't go through when I submit the real paperwork?
It's very possible they screwed it up. For a pre-approval, they don't really go through the details.

It comes down to your job history. If the history is not there, you're not getting approved with a temporary position.
Kevin Somnauth, CFA
Principal Broker/Owner - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
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Chickinvic wrote: What is your rush to buy something? There's no shame in renting, and it provides a great deal of flexibility to move if you need to for work. Your job isn't secure from the sounds of it. I would not be comfortable taking on a debt like that by myself without very secure employment. You don't sound ready to be getting into this to be honest.
I wasn't approved for my first attempted home purchase... looking back I was glad it happened. I just wanted into the market and get into the best I'd qualify for - which was a condo further out from the city core, in a place where I really didn't do anything. fast forward 3-4 years later it appreciated maybe 10K and I'm still glad I didn't move to that area.
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Chickinvic wrote: What is your rush to buy something? There's no shame in renting, and it provides a great deal of flexibility to move if you need to for work. Your job isn't secure from the sounds of it. I would not be comfortable taking on a debt like that by myself without very secure employment. You don't sound ready to be getting into this to be honest.
Living under parents roof and want my own place / don't want to be priced out of the market; I don't think prices are going to go up, but interest rates will. I work at a place where people still start and end their careers, many started as temporary and are now 10 years in, it means nothing. I can't say exactly what I do, but my temporary position will be needed for at least 7 more years.

If I was renting the decision would be obvious, where the hell can you find a place to rent for $1400 these days? And then you still have to pay utilities on top and maybe get insurance. Owning a house would be cheaper or the cost the same, with the benefit of knowing that you're living on your terms.
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nabiul wrote: Living under parents roof and want my own place / don't want to be priced out of the market; I don't think prices are going to go up, but interest rates will. I work at a place where people still start and end their careers, many started as temporary and are now 10 years in, it means nothing. I can't say exactly what I do, but my temporary position will be needed for at least 7 more years.

If I was renting the decision would be obvious, where the hell can you find a place to rent for $1400 these days? And then you still have to pay utilities on top and maybe get insurance. Owning a house would be cheaper or the cost the same, with the benefit of knowing that you're living on your terms.
No offence, but where in the GTA area do you think you’re going to find a detached home for anywhere close to $300k that isn’t going to be a HUGE money pit? And keep in mind that with home ownership, you have property taxes, maintenance, all your utilities, and home owners insurance (which is about 5x more expensive than tenant insurance...

C
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Jan 11, 2017
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Find something for around 200k so your not struggling with unexpected costs. Your best bet it to start with the smallest cheapest for now by yourself so your not throwing your money away renting. When your financial situation changes or you find a partner then upgrade.
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CNeufeld wrote: No offence, but where in the GTA area do you think you’re going to find a detached home for anywhere close to $300k that isn’t going to be a HUGE money pit? And keep in mind that with home ownership, you have property taxes, maintenance, all your utilities, and home owners insurance (which is about 5x more expensive than tenant insurance...

C
Oshawa.

Hearing what some of my coworkers are paying for rent, there's barely any difference from owning a small house. They're just covering some one elses mortgage.
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nabiul wrote: Oshawa.

Hearing what some of my coworkers are paying for rent, there's barely any difference from owning a small house. They're just covering some one elses mortgage.
It doesn't matter to me whether you buy or don't buy... But a 300k mortgage will run you around $1500/month by itself. Plus you have property taxes and maintenance on top of that. And an old house at the lower end of the price spectrum (average selling price for an Oshawa detached house is around 500k) will need repairs and maintenance. So you're probably talking about 2k/month. Plus there's no cap on how fast your expenses can go up, unlike rent.

If you gave the bank all the information accurately and honestly when you applied for pre-approval, then you should be ok with actually getting that approved (subject to interest rate and government changes). That doesn't mean that it's a good idea... You have to do up a budget and figure out whether you can afford it. I still would make any offers subject to financing.

Oh... And for a $310k mortgage, it would cost $1560 @ 3.29%. It would only be $1478 @ 2.79%. That's a reasonably significant swing, which is why the bank cut back on the pre-approved amount.

C
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nabiul wrote: Oshawa.

Hearing what some of my coworkers are paying for rent, there's barely any difference from owning a small house. They're just covering some one elses mortgage.
Again, before you start looking for a house, do you have any relevant work history?

Because you're not going to get approved with a temporary job with no experience (ie fresh out of school).
Kevin Somnauth, CFA
Principal Broker/Owner - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
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nabiul wrote: Living under parents roof and want my own place / don't want to be priced out of the market; I don't think prices are going to go up, but interest rates will. I work at a place where people still start and end their careers, many started as temporary and are now 10 years in, it means nothing. I can't say exactly what I do, but my temporary position will be needed for at least 7 more years.

If I was renting the decision would be obvious, where the hell can you find a place to rent for $1400 these days? And then you still have to pay utilities on top and maybe get insurance. Owning a house would be cheaper or the cost the same, with the benefit of knowing that you're living on your terms.
Your looking in Oshawa dude. There are lots of places in Bowmanville, Curtis and Oshawa in that price range. Unless your looking for top of the line rental that have 3+ bedrooms, and are decked out to the nines. Look for something more modest. And modest can also mean nice/desirable, I have a few rentals in those areas that come in at around that price point. Some are duplexes some are not but they are all well maintained and nice places to live.

And lol at the cost of ownership being the same as renting, renting is cheaper and it's not even close to an argument.
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fryguy1987 wrote: Your looking in Oshawa dude. There are lots of places in Bowmanville, Curtis and Oshawa in that price range. Unless your looking for top of the line rental that have 3+ bedrooms, and are decked out to the nines. Look for something more modest. And modest can also mean nice/desirable, I have a few rentals in those areas that come in at around that price point. Some are duplexes some are not but they are all well maintained and nice places to live.

And lol at the cost of ownership being the same as renting, renting is cheaper and it's not even close to an argument.
I've been looking for the past 4 months. Mostly it's been nothing but a sea of crap; plywood houses that look like they're ready to sink into the ground or are in places that are sketchier than the worst places in scarborough. Further out east it's nothing but more plywood houses in some kind of retirement community with massive maintenance fees.

A decent place came up in oshawa which is why I've been scrambling, but I'm not willing to take the risk right now.

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