There are generally three different situations you can find yourself in when it comes to living situations; living with parents, renting, or owning.
A lot of the times the first decision someone will need to make is whether they buy a home to live in, buy a home to rent to someone else, or buy a home to live in while also renting out a portion of it. There are lots of pro’s and con’s to both. Below are some of the numbers and things to consider when looking at each of them.
Buying with The Intention to Rent
Buying a property for the purposes of renting it out to someone else comes with different qualifying criteria and different mortgage product options. The following are some of the important points to consider:
The minimum down payment required is 20% of the property price and this down payment must be from your own savings. It cannot be gifted from someone else.
Only a portion of the rental income can be used for the qualifying of how much of a mortgage you can afford to borrow. Some lenders only use 50% of the income and add it to yours. Others may look at taking 80% of the rental income and subtracting your expenses which can have a much higher impact on how much you can afford.
Interest rates usually have a premium on them when the mortgage is for a rental property compared to a mortgage being requested for a property someone plans on living in. This premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
The following is a typical scenario you can expect to qualify for in a rental situation:
$450,000 purchase price
$90,000 down payment (20%)
$360,000 mortgage
$1,665 monthly mortgage payment
$1,400 in monthly rental income
$66,500 a year in income
$0 month in consumer debt payments
Buying with The Intention to Own
Buying with the intention of living in the property as your primary residence is the most common and the guidelines are well known:
5% minimum down payment from own resources or from gifted funds coming from an immediate family member.
Insurance premium for having less than 20% as a down payment
Lowest interest rates available for high ration purchases of home becoming owner occupied (Loan-to-value of more than 80%)
If first time home buyers, you may be able to utilize grants and avoid property transfer taxes which you will not receive on the purchase of a rental.
The following is a typical scenario you can expect to qualify for in an owner-occupied situation:
$450,000 purchase price
$22,500 down payment (5%)
$444,600 mortgage
$2,039.63 monthly mortgage payment
$97,000 a year in income
$300 in monthly debt payments
Buying with The Intention of Both
Owner-occupied properties with a rental are really the best of both worlds. Only issue is, it needs to be a self-contained suite. Therefore, second bedrooms in town-homes or condos do not qualify. It is typically only detached homes with rental suites that are allowed but the rate premiums and minimum down payments fall under the owner-occupied side. Below is a typical scenario you could expect with this kind of purchase:
$1,000,000 purchase price
$100,000 down payment (10%)
$927,900 mortgage
$4,256 monthly mortgage payment
$1,200 in monthly rental income
$175,000 a year in income
$750 month in consumer debt payments