This post is the sixth in a series on my family’s decision to downsize. Links to previous posts can be found at the end of this article.
By now, my family and I had decided that it was time to downsize. We had even planned where we wanted to move AND — talk about putting the cart before the horse — we had even chosen the house we wanted to downsize to!
Piece of cake now, right?
What we had kinda skimmed over was how we were going to pay for the second house.
AHAHAHAHAHAHAHA! Yes, go ahead, laugh with me. AHAHAHAHAHAHA!
I mean, talk about not getting the reality of the situation.
Let’s recap: My husband’s business had shut down and he was without an income. I was self-employed and worked on commission only. All of our savings were registered retirement savings (RRSPs). And we owned a home that had both a mortgage and a line of credit secured against it.
And yet we thought we would simply request a second mortgage from the bank. Again, AHAHAHAHAHA!
Filed under “Things We Had Never Thought About”: The bank will not consider your registered savings because they are registered (and subject to huge tax implications when cashed out), and it will only partially consider any equity you may have in your current house. What the bank wants to know is, how in the world will you pay two mortgages, a line of credit, two utility bills, two home insurance bills, and two sets of taxes every single month (never mind your other expenses) with so little money coming into the household every month?
“But we’re going to eventually sell our first house,” you may say, as we did.
“Yes,” said the Bank, “but it’s not going to happen right away and in fact nobody can say with any certainty when it will happen.”
“Well then, we will rent out our first house,” you may say, as we did.
“Yes,” said the Bank, “but we need to assume that the house may remain vacant a certain number of months during the year, with no tenants and no rental income.”
“BUT THIS IS JUST A TEMPORARY SITUATION!” you may scream (silently or otherwise), as we did. (Because it is, right? I mean, in your heart of hearts, you KNOW that things will get better, right?)
“Great,” said the Bank, “come back to us when this is no longer the situation, and we’ll re-evaluate then.”
And so here’s the next reality check, learned painfully: Unless you have INCOME – as in, money coming in each month – it’s going to be hard to get approved for a mortgage. And without a mortgage approval, you will not be buying another house. And that’s where you’ll definitely need the help of a property management company.
Ego slap: Our situation had changed, and it had had an effect not just on the daily management of our lives — things that we could handle quietly on our own, privately — but also in the more public realm of our relationship with the bank that we had been doing business with for many years, the bank that had always been only too happy to extend us more and more credit.
You’d think I’d know this right? I mean, I’m in the business of helping people buy and sell homes in Montreal’s West Island. Somehow, though, when you’re in the situation yourself, pride “helpfully” adjusts your blinders, and it becomes so hard to really see how much your financial situation has fundamentally changed and how that change is no longer just felt privately. It is now public, and it can be seen by others, like the bank.
So, if this is the situation that you are in — feeling the need to downsize — take thouself to a bank or mortgage broker forthwith! And find out exactly what your situation is in terms of being able to purchase a second house before selling your first, or even qualifying for a mortgage should you sell the first house because that is not a given either, depending on what your credit looks like. If you’ve been behind on debt payments for a while, your credit may have taken a serious hit, and it is not at all a given that you will be approved for a mortgage even if you DO sell your house first. The banks are super picky these days — actually, the last few years — and with interest rates expected to rise in the not-too-distant future, I believe the banks will become stricter than ever.
I suggest you speak with a mortgage specialist, as these are the people who deal with mortgages day in and day out, versus others at the bank who only deal with mortgages once in a while. Mortgages are complicated; they are products with different terms and pay-back options, all of which affect your bottom line beyond the interest rate. I have seen too many deals sour from people not getting the experts involved in the mortgage approval process right from the beginning. (Should you need recommendations, I know mortgage specialists with every major bank. I also work closely with an excellent mortgage broker whose job is to find you the best mortgage for your needs among all of the major banks. She also works with alternative lenders should your situation require it. These are what we call B lenders — they have higher interest rates, but they’re not people who will get you beat up if you miss a payment. We’re not in the movies here.)
In the end, my husband and I swallowed our pride and asked a parent who had excellent credit and virtually no debt to co-sign our mortgage application with us. His name also had to be added to the deed for the new house. We took care of the mortgage payments on the new house ourselves, but his name was tied to it and so when we eventually sold our first house, we paid the notary fees involved to have his name removed from the deed and from the mortgage documents. This cost us several hundred dollars but it’s what had to be done, and we were very fortunate to even have this option.
So, if you are in this situation, please have a talk with your bank, or hit me up if you need a good mortgage specialist or mortgage broker. You need to truly know your situation and your options. You don’t need to do anything with this information just yet, but it is your starting point. And it’s essential. Remember, we’re taking the blinders off. We’re taking the reins. And we will get through this.
In my next blog post, I’ll talk about the pros and cons of buying before selling (if that’s an option for you) and selling before buying. There are big stressors and risk in both situations, and different pros as well of course.
Bon courage, my friends.