COMM 229 Notes – Chapter 5

Module 5:

Purchasing and financing a home:

Income effects debt capacity, however income does not effect credit score

Mortgage backed Securities (MBS) - banks will lend money and approve mortgages, they then will send
packages of these mortgages to third parties to collect money at a discounted rate. Example. Bank A,
accepts 10 mortgages valued at 10 million dollars, they then sell these mortgages to Bank B for 9 million
and instantly gain this cash back and don’t have to worry about collecting payments for the next 25
years. Bank B in turn gets this portfolio for a discount. These are usually good investments when Bank A
does its due diligence and only offers mortgages to verified buyers who are unlikely to default on their
mortgage. These MBS were verified at AAA standards. During the financial crisis in 2008 mortgage
officers got greedy and began approving everyone without verification because they worked off the
commission of approving mortgages. this ruined MBS because the investments were now much more
risky because the due diligence wasn’t done to ensure buyers wouldn’t default. This created a financial
crisis because people were unable to make payments and banks couldn’t collect and this led to the
financial crisis because banks were lending more money than they could collect.

Selecting a type of home

 Single-family detached
 Semi detached home
 Duplex/triplex
 Townhouse
 Condo
 Apartment
 Mobile Home

Semi vs duplex
Semi is attached like a duplex but you own your own part of land and pay your own property tax,
duplexes is a shared equity, you own a portion of the house and you only own a portion of the equity
and you pay a portion of the property tax.

Condo vs Appts
A condo is individually owned and an apartment owned by a company and rents out the units. Damages
are covered by the landlord in the apartment, in condos you must pay for all your own damages, condo
taxes only work towards maintaining the outside of the properties.

When determining what type of property to buy, the number one factor should be potential resell
factor. Single detached usually appreciate the most, second is semi-detached homes, last is condos.
Typically the more expensive the house the quicker the appreciation. Condos are however a good
investment for rental properties, because condos companies will do a lot of things that reduce labour
because of condo fees.

GDS (Gross Debt Service) vs TDS (Total Debt Service)

  Threshold for GDS is 32%
 Threshold for TDS is 40%
GDS = (Mortgage PMT + Heating Cost + Property Tax + 1/2 Condo Fees) / Total Monthly Gross Income

TDS = (Mortgage PMT + Heating Cost + Property Tax + 1/2 Condo fees + All other debt PMTS) / Total
Monthly Gross Income

Example:
Blake and Donna have asked their bank to help them determine whether they
qualify for a mortgage on a $375 000 home on which they would like to make an
offer. The couple will make a down payment of $75 000 and the mortgage will be
amortized over 25 years. As part of its initial assessment, the bank has to calculate
the couple’s GDS and TDS ratios. The current five-year fixed mortgage interest rate
is 6 percent, compounded semi-annually.* Based on its discussion with the couple,
the bank gathers the following additional information:

Blake’s monthly gross income = $3500

Donna’s monthly gross income = $3500
Monthly mortgage payment = $1919*
Monthly heating costs = $120
Monthly property taxes = $250
Monthly consumer debt payment = $500

3500+3500 = 7000 total monthly income

1919+120+250=2289 total monthly costs without debt
1919+120+250+500 = 2789 total monthly costs with debt

GDS = 2289/7000 = 0.327

TDS = 2789/7000 = 0.3984

They do not meet the threshold for GDS but they do meet the threshold for TDS