Personal Finance

Financial Help (family asking for advice on how to reduce debt so they can qualify for higher mortgage amount)

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  • Sep 24th, 2020 9:55 am
[OP]
Sr. Member
Mar 4, 2008
574 posts
102 upvotes
BC

Financial Help (family asking for advice on how to reduce debt so they can qualify for higher mortgage amount)

Hey, so one of my family members reached out to me as they know I have an interest in learning about finances/investing. I am no means a financial advisor, but for a quick phone call they wanted to start somewhere. They applied for a mortgage and was told they would be able to get about $300,000 which is peanuts and will buy them maybe a bathroom in the Vancouver Island real estate. They asked me for suggestions on what they could do. They want to be able to get a higher mortgage amount within the next 6 months to a year or so and so their main question was what would be best to pay off first to help get them a higher lending amount. Now I am not sure if there are better routes to go to help their credit score, but in my opinion, pay off the debt with the highest interest rate first. Their situation looks like this:

$25,000 in Savings

Debt:
Visa credit card (19% interest - OUCH!) - $10,000
Line of Credit @ 5.45%: $50,000 (maxed)
Auto loan - vehicle 1: $11,200 vehicle 2: $8,000 auto loans at 1.9% and 2.9%

I don't know their credit score. I did not talk to them about their income (which I know would be ideal). But from what I know, I would estimate as a couple they make $120,000/year before taxes. They have 2 kids. They currently rent at their parents in a cottage (cheap rent) and so they want to be able to buy their own home.

IMO, they need to analyze & track their expenses and start thinking about their monthly bills and start being mindful of what they are buying/paying for. Pay off their highest interest rate debt first (Visa first then Line of Credit) and maybe leave their auto loans. Use $10,000 from their savings to pay off that VISA card asap and switch to paying off their credit card monthly. Once they have that paid off, is there anything they can do to put a potential mortgage & their line of credit together?
Last edited by Mars2012 on Sep 18th, 2020 2:42 pm, edited 1 time in total.
Reason: added detail to title for clarity
43 replies
Member
Jun 6, 2014
267 posts
104 upvotes
Toronto, ON
Assuming the savings was going to be their down payment. After paying off the credit card. With 15k at 5% downpayment, you can only get something for 300k anyways.
Deal Addict
User avatar
Nov 26, 2003
1278 posts
297 upvotes
They should forget about buying a house, focusing on paring down expenses and paying off that LOC, then start saving. In the meantime, do whatever they can to increase income. Its not hard, most people just dont want to do it.
Sr. Member
User avatar
Apr 7, 2007
696 posts
533 upvotes
Toronto
Take it from someone like me who has a similar income as a couple. We have no debt, one car (which is paid), triple what they have in savings, we’re still not ready. I don’t think they are either.
Deal Addict
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Oct 24, 2016
1181 posts
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ON
I’m surprised with so much debt they are even entertaining the idea of purchasing a home. First question is have they done their homework to determine how much debt they can pay off in the next 6-12 months?
Isn't it great to live in the 21st century where deleting history has become more important than making it.
Deal Guru
User avatar
Mar 23, 2008
12726 posts
9373 upvotes
Edmonton
JimboD wrote: Hey, so one of my family members reached out to me as they know I have an interest in learning about finances/investing. I am no means a financial advisor, but for a quick phone call they wanted to start somewhere. They applied for a mortgage and was told they would be able to get about $300,000 which is peanuts and will buy them maybe a bathroom in the Vancouver Island real estate. They asked me for suggestions on what they could do. They want to be able to get a higher mortgage amount within the next 6 months to a year or so and so their main question was what would be best to pay off first to help get them a higher lending amount. Now I am not sure if there are better routes to go to help their credit score, but in my opinion, pay off the debt with the highest interest rate first. Their situation looks like this:

$25,000 in Savings

Debt:
Visa credit card (19% interest - OUCH!) - $10,000
Line of Credit @ 5.45%: $50,000 (maxed)
Auto loan - vehicle 1: $11,200 vehicle 2: $8,000 auto loans at 1.9% and 2.9%

I don't know their credit score. I did not talk to them about their income (which I know would be ideal). But from what I know, I would estimate as a couple they make $120,000/year before taxes. They have 2 kids. They currently rent at their parents in a cottage (cheap rent) and so they want to be able to buy their own home.

IMO, they need to analyze & track their expenses and start thinking about their monthly bills and start being mindful of what they are buying/paying for. Pay off their highest interest rate debt first (Visa first then Line of Credit) and maybe leave their auto loans. Use $10,000 from their savings to pay off that VISA card asap and switch to paying off their credit card monthly. Once they have that paid off, is there anything they can do to put a potential mortgage & their line of credit together?
Before they can consider buying a house, they need to consider how they got themselves into this financial situation when their housing costs are so little. Otherwise, they'll quickly find themselves in a worse situation when they have the same financial habits, but a mortgage payment that's 3 or 4 times what they're paying now for rent (plus property taxes, and repairs, and...).

C
Member
May 31, 2017
308 posts
402 upvotes
Anyone with that much CC debt and LOC debt should not be thinking about buying a house until they get much better control of their finances. There is no "finding a way" that makes any sense.

The $25K they have is really how much they should have anyways as an emergency fund. Assuming it's not currently in an RRSP or TFSA but some sort of general savings account, they should take most of this and start paying off the credit cards (first) and then the LOC - keep a few K aside and leave it as a just in case fund. They need to pay off pretty much ALL of that debt and save another $50K MINIMUM as a downpayment (and really, they should target 15% of whatever home value they want to buy as a minimum - and, I'd suggest working backwards as a percentage of take home pay for monthly payments - I think total home costs should be no more then 30% of after tax income personally - work out the monthly budget and calculate that back into the home their cash flow can afford - then take 15% of that as a downpayment target) - and all of that is over and above rebuilding that current $25K in savings - which they shouldn't use towards the house (ideally). I realise that a great many people do not have any emergency fund but, I'd hope, the current Covid pandemic has opened up some folks eyes to the need for one.

If their debt was built out of mostly frivolous spending habits then you should burst their bubble because anyone who tries to help them buy a home in their current financial condition is setting them up for failure.
I'm going to guess they are also not saving anything for retirement...they need to get that set up too. 15% a year of gross income if they are under 25...if they wait to save anything that percentage rises as they get older. Start young and you can keep the percentage lower without increasing it (on a PERCENTAGE basis). Wait to save until you're in your 40's and it needs to be around 25% - 30% of your gross...which is crushing. Get the debt gone, get the retirement savings plan set up, then get the down payment and emergency fund rebuilt. THEN worry about buying the home.

Personal finance isn't hard...it just takes discipline, taking a small amount of time to budget and proper goal setting. Our public education system has failed the past few generations by not teaching this - and it should start in GRADE SCHOOL and go through high school.
Deal Addict
User avatar
Dec 11, 2003
2513 posts
1055 upvotes
Toronto
I'm just some regular Joe but I would tell them to hold their horses and pay off their $80,000 debt first (or at least most of it). That's a lot of debt. As others have said, they're going to get buried into a mountain of debt if they get another one for a house.

With a combined income of $120,000, I wonder if they think they have a ton of money and just went nuts buying expensive stuff (including cars) thinking they'll pay it off in no time.

I'm thinking they should take $10,000 from their savings and pay off their Visa. Then work on the other debts while trying to build back up their savings. I hope they both have an RRSP. They can borrow money from their RRSP for a down payment if this will be their first home. If they don't have an RRSP I feel like they are living outside of their means. Way outside.
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Deal Fanatic
Jan 21, 2014
5884 posts
3281 upvotes
JimboD wrote:
$25,000 in Savings

Debt:
Visa credit card (19% interest - OUCH!) - $10,000
Line of Credit @ 5.45%: $50,000 (maxed)
Auto loan - vehicle 1: $11,200 vehicle 2: $8,000 auto loans at 1.9% and 2.9%

Something very wrong with this picture, why $25K savings (probably getting next 0% interest) and yet carrying $10K of 19% and $50K of 5.45%. Then the 2 auto loans :facepalm: . I think with the way they are spending, getting a bigger mortgage is like digger a bigger hole for financial trouble in the future
Deal Fanatic
Jan 19, 2017
5745 posts
3194 upvotes
The question they should ask is can they afford to buy a house even if they can get a higher mortgage amt?
Deal Expert
User avatar
Jan 27, 2004
46868 posts
9984 upvotes
T.O. Lotto Captain
We need to see the last 3 months of all of the following

-bank statements
-credit card statements
-all their bills

Its intrusive as hell. But its the only way you’ll get legit advice.
We gotta see the money going in vs the money going out

Otherwise its

“Spend less money! Pay off your debt!”

You really gotta illustrate these things and track them on paper. Thats how you get results.
Last edited by UrbanPoet on Sep 18th, 2020 6:32 pm, edited 1 time in total.
Deal Addict
May 16, 2017
1853 posts
2349 upvotes
JimboD wrote: ... Their situation looks like this:

$25,000 in Savings

Debt:
Visa credit card (19% interest - OUCH!) - $10,000
Line of Credit @ 5.45%: $50,000 (maxed)
Auto loan - vehicle 1: $11,200 vehicle 2: $8,000 auto loans at 1.9% and 2.9%

...
They've deluded themselves into a belief that they have savings for a down-payment on a house when they are actually in the hole with that credit card debt and LoC. The auto loans at least have some tangible value against them.

Take the $25000 and pay down the credit card to ZERO and never let it carry a balance over the payment due date again. Put the rest against the LoC and then pay it down as it is next highest interest rate. Keep those vehicles until they fall apart unless the loans are completely paid off. THEN - start thinking about saving for a down payment.

Set a family budget and stick to it.
Newbie
Mar 18, 2010
45 posts
18 upvotes
JimboD wrote: Hey, so one of my family members reached out to me as they know I have an interest in learning about finances/investing. I am no means a financial advisor, but for a quick phone call they wanted to start somewhere. They applied for a mortgage and was told they would be able to get about $300,000 which is peanuts and will buy them maybe a bathroom in the Vancouver Island real estate. They asked me for suggestions on what they could do. They want to be able to get a higher mortgage amount within the next 6 months to a year or so and so their main question was what would be best to pay off first to help get them a higher lending amount. Now I am not sure if there are better routes to go to help their credit score, but in my opinion, pay off the debt with the highest interest rate first. Their situation looks like this:

$25,000 in Savings

Debt:
Visa credit card (19% interest - OUCH!) - $10,000
Line of Credit @ 5.45%: $50,000 (maxed)
Auto loan - vehicle 1: $11,200 vehicle 2: $8,000 auto loans at 1.9% and 2.9%

I don't know their credit score. I did not talk to them about their income (which I know would be ideal). But from what I know, I would estimate as a couple they make $120,000/year before taxes. They have 2 kids. They currently rent at their parents in a cottage (cheap rent) and so they want to be able to buy their own home.

IMO, they need to analyze & track their expenses and start thinking about their monthly bills and start being mindful of what they are buying/paying for. Pay off their highest interest rate debt first (Visa first then Line of Credit) and maybe leave their auto loans. Use $10,000 from their savings to pay off that VISA card asap and switch to paying off their credit card monthly. Once they have that paid off, is there anything they can do to put a potential mortgage & their line of credit together?
They need to pay off their debts off first, starting with the Credit Card.
Deal Addict
Jan 15, 2017
4363 posts
3955 upvotes
Ottawa
There are generally 3 things that you can do to increase your mortgage qualification amount:

1. Pay off any other debts. Any money that you are currently paying on any other debt is less money that you have available for a mortgage. And with mortgage rates so low right now, the impact can be huge. Monthly payments of about $427 is equivalent to about an extra $100k in mortgage. Getting out of debt is usually the biggest change that people can make,

2. Increase your income. Mortgage ratios are compared against your total income so the higher the income, the more mortgage you may be able to borrow.

3. Increase your down payment. Mortgages require a minimum 5% down payment. This means that if you have $20k to put down then you can only potentially borrow a maximum of $400k, regardless of your income. $30k down and the potential maximum may increase to $600k. So just an extra $10k may buy you an extra $200K (conditional of course on your meeting all the other criteria). $40k down and you could be looking at a potential mortgage of $800k.
Deal Addict
Oct 24, 2010
2022 posts
1839 upvotes
Ottawa
Let's look at this another way...

If they had 0 debt, they'd still only qualify for a stretch $525k purchase price at a minimum down payment of $27,500, using CMHC's maximum of 35% GDS. And I'm not a fan of pushing the GDS that high.
Deal Addict
Oct 24, 2010
2022 posts
1839 upvotes
Ottawa
skeet50 wrote: 3. Increase your down payment. Mortgages require a minimum 5% down payment. This means that if you have $20k to put down then you can only potentially borrow a maximum of $400k, regardless of your income. $30k down and the potential maximum may increase to $600k. So just an extra $10k may buy you an extra $200K (conditional of course on your meeting all the other criteria). $40k down and you could be looking at a potential mortgage of $800k.
Minimum downpayment is 5% below $500k, and 10% for any amounts above $500k.

So $40k actually only gets you a purchase price of $650k. Every $10k above $500k only gets you an additional $100k.
Deal Addict
Jan 15, 2017
4363 posts
3955 upvotes
Ottawa
Dynatos wrote: Minimum downpayment is 5% below $500k, and 10% for any amounts above $500k.

So $40k actually only gets you a purchase price of $650k. Every $10k above $500k only gets you an additional $100k.
Thanks. They changed the rules since I left the business.
Deal Guru
Dec 5, 2006
10815 posts
5803 upvotes
Markham
Also one thing to consider is housing expenses. Ownership comes with price: heating, hydro , property tax, repair...
Deal Addict
User avatar
Nov 26, 2011
3158 posts
444 upvotes
They’ve been getting cheap rent and still fell into debt. I don’t see how they’d even afford a house.
Sr. Member
Nov 6, 2015
976 posts
576 upvotes
Guelph, ON
Even if someone gave them a bigger mortgage, they shouldn't do it because they obviously can't handle their finances. Their real problem is their huge consumer debt, it would be a major problem even without trying to add a house purchase into it. The bulk of their savings should go to paying down the debt - first would be the credit card, pay off ALL of it with their savings.

Maybe point out to them that their credit card debt is $1900 a year interest, and LOC is $2725, so they are paying out $4625 just for interest every year for those two debts alone. In six years that would be more than their savings!

The house is just a fantasy, wake them up to their reality.

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