In our Rev N You with Real Estate newsletters, the last two weeks have been dedicated to the money you need for real estate investing. I talked about how to invest in real estate with no money and how to finance your real estate investments.
I covered a lot of detail in those articles. So much detail, in fact, the subject is starting to take over our website and this blog. But, getting money for real estate investing is a pretty important subject. It deserves a lot of space!
So, today I want to review a list of critical definitions a real estate investor should know before they look for real estate financing.
Here’s some important real estate financing words to know:
Amortization: The length of time that your mortgage will be paid over. Traditionally it was 25 years but many people opt for 30 year amortization periods now in order to reduce their monthly payments. You can also have a shorter time frame.
Loan to Value (LTV): The value of the property relative to the debt you are proposing or currently have on the property. For example, if you have a house that is worth $400,000 and you have $300,000 outstanding on the mortgage, your LTV is 75%. This means you have 25% equity in that property.
Gross Debt Service Ratio (GDS):This is a number banks use to calculate how much you can afford to spend on a monthly mortgage payment. They will use the principal, interest and property taxes and heating costs to calculate what your total monthly payment will be.
They will compare this to your gross income for the month, and if it exceeds 30-35% they probably will not give you the loan.
Example: Mortgage ($1,100) + Taxes ($150) + Heat ($75) = Monthly Expenses ($1,325)
Annual Income $50,000 divided by 12 months = $4,166
$1,325/$4,166 = 31.8%
You probably can qualify for that size of mortgage with that ratio of expenses to income.
Total Debt Services Ratio (TDS): This is a similar calculation to the one above but the bank will take into consideration other debt you are carrying such as a car loan or student loan payments. Most lenders are looking for a number under 40 – 45% of your gross income (not your after tax income).
Using the same example, let’s assume you also have a student loan and a line of credit.
Monthly Expenses are $1,325 + $325 + $200 = $1,850
$1,850/$4,166 = 44.4%
You may still qualify as long as your credit score is very good, but this is starting to get on the high side of what a bank would like to see for the TDS ratio.
High Ratio Mortgages: In Canada, these are also called insured mortgages. And any mortgage that has an LTV of over 80% will need to be insured by one of the mortgage insurance companies. These are considered high ratio mortgages because the ratio of debt to value of the property is fairly large.
Assumed Mortgage: It’s a good idea to check to see if your mortgage or the mortgage on the property you’re looking to buy, can be assumed, which is essentially passing on the mortgage product (including the rate) to someone else. This will eliminate the issue one may encounter of steep penalties for breaking your mortgage when you sell or buy a property.
Blanket Mortgage: When you have many properties, this is a strategy for taking advantage of the equity within those properties to purchase a new property. You then get one mortgage that covers all of those properties. This is also known as an inter-alia mortgage.
There are plenty of other words to learn when it comes to real estate financing, but these are some important ones that are not as commonly known.