Can I add my existing debt to my new purchase?

A common question many buyers ask is:

I’m buying a home - can I add my other debts to the mortgage?

The short answer is NO.  This can get confusing, because If we’re talking about refinancing a property that you already own, then there may be the opportunity to increase your mortgage amount to pay off other balances, but with a purchase it works differently. 

Basically, you can’t finance 100% (or more) of a residential property, so the maximum allowable mortgage is dependent on the value of the property.  Why?  Simply put, because borrowers need to have some “skin in the game” and the more they’ve put into the property from their own resources (meaning cashola), the less likely they are to walk away if the going gets tough.

If the property is appraised and valued at $500,000, then the maximum purchase financing available is 95% of this amount, or $475,000 for a high ratio mortgage.  For a conventional mortgage, the requirement is 20% down payment which would give you a maximum mortgage of $400,000 (and a required down payment of $100,000).

With a purchase transaction, the question isn’t really can I add my debt to the mortgage, but rather can I lower my down payment amount, so I have funds left over to pay those debts?  If your goal is to keep cash in hand to pay off that car loan balance (or for moving expenses or new furniture) then revisiting the down payment is the first step.

Ultimately, you control how much you put down (to a minimum of 5%, assuming you meet the qualifications).  Check out the example below:

You want to buy a townhouse at $500,000.  You have $150,000 saved that you planned on putting down, but you haven’t factored in moving expenses and you still have that pesky $15,000 balance on a high rate credit card you’d like to get rid of.  When doing the mortgage application, discuss with your advisor putting a lower amount down.  In this case you may want to consider putting 20% down ($100,000) and using the $50,000 to pay off the card and keep some cash in hand as a cushion.

But what if I have a small down payment?  Following the scenario above, it still might make sense to keep cash on hand, even if you have less than 20% down.  For example, let’s say you’re purchasing a $300,000 condo and you’ve saved up 15% down ($45,000).  This would give you a mortgage of $255,000 (plus premium) and payments of around $1250/month based on fall 2019 rates.  However, if you chose instead to put 10% down ($30,000) you’d have a mortgage of $270,000 (plus premium) and approximate payments of approximately $1325/month.  Yes, your payment would be $75/month higher, but you’d keep $15,000 cash in your pocket for debt consolidation or whatever other purpose you like.

But what if I only have the minimum down payment?  In this case you would not be able to reduce your down payment, so you’d have to factor in those other monthly payments to your budget or explore alternatives (like an unsecured debt consolidation loan or help from family).

Ultimately, keeping your total monthly payments (including your mortgage payment) manageable is vital to managing your budget while giving you the opportunity to grow your wealth.  There is nothing fun about being house poor and ensuring that you are getting balanced advice and perspective from your Advisor is critical to finding you the best solution.

Questions?  Let’s talk.