Money Problem

Changes to the rules for government-backed insured mortgages came into law in July 2012. These changes apply to those who put down less than a 20% down payment.

How do these changes affect a potential home buyer? First of all, the maximum mortgage amortization period has been reduced to 25 years from 30 years. Second, for existing homeowners, the maximum amount that can be borrowed to refinance a home changes to 80% from 85%. For many people, these changes mean that monthly mortgage payments will rise.

In order to qualify for a mortgage, you will now need to keep your debt-to-income ratio lower than 40%. This is defined as monthly mortgage payments (principal and interest plus taxes) plus monthly payments on your line of credit and credit cards compared to your income. See the example below for more information.

 

Example:

  • In the existing situation, it is assumed that you spend $1000 a month on credit card payments and other debts and that you want to get mortgage that costs $1000 per month in principal and interest payments. Your debt-to-income ratio in this situation is 50 percent, which makes getting a new mortgage very difficuly.
  • If you do a Consumer Proposal, you can reduce your monthly debt repayment to $300 which reduces your debt-to-income ratio to 35 percent. This puts you in a situation where you can apply for a mortgage
Description Existing Proposed
Debt Repayment( Line of credit, credit cards) $ 1000 $  300
New Mortgage payment ( principal & interest) $ 1000 $ 1000
Realty Taxes $  300 $  300
Total Debt Service Costs $ 2300 $ 1600
     
Monthly after tax income $ 4600 $ 4600
     
Ratio     50%     35%
     

 

If your debt level makes it tough to get a mortgage, you must reduce your debt before you apply. A smart way to do so is through the Consumer Proposal process. In a consumer proposal, you make an offer to your creditors through a Proposal Administrator.

A Consumer Proposal lets you reduce your unsecured debt by settling with your creditors. Your offer will see you pay a small percentage of what you actually owe. It will also spread your payments over a longer period of time in order to make them more manageable. Once you complete your Consumer Proposal you will be free of your debts. You can then apply for a mortgage and purchase a home without worrying about hitting the maximum debt ceiling.

Please contact us at A. Farber & Partners today toll-free at 310-1100 (or by using the form on the right). We can sit down with you and explain this debt reduction strategy. Our first meeting is free of charge. We can provides you with a no-obligation review of your financial situation which will help you manage your existing debt and allow you to prepare yourself for a brighter financial future.





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