With a minimum 20% down payment purchasers have many options available to them when buying investment/rental property.
What is the cost for Mortgage Insurance?
With 20% down the mortgage is conventional and no mortgage insurance is required.
Underwriting Fee: There is no underwriting fee for conventional mortgages.
Mortgage Rates: Discounted mortgage rates
Net Worth
The requirement for a minimum net worth varies from lending institution to lending institution. Most lending institutions do not have a minimum net worth, however some require that you have a minimum $100,000 net worth per rental property.
Debt Coverage Ratio
The requirement for debt coverage ratio varies from lending institution to lending institution. Some institutions will use rental off set for qualifying purposes. While other lending institutions will use 1.10% debt coverage ratio.
1.10% debt coverage ratio is arrived at by dividing the Net Operating Income by the Debt Service. (Please see Debt Coverage Worksheet below.)
20% Down Mortgage (1.10% Debt Coverage Ratio) Example:
- Purchase price of $281,250
- Mortgage of $225,000 at 4.4%
- $1232 P&I
- Monthly rent: $2000
Debt Coverage Ratio Worksheet:
| Potential Gross Income (Monthly Rent x 12): |
(a) |
$ 24,000 |
| Less: Vacancy and Bad Debt Allowance (5%): |
(b) |
$ -1,200 |
| Effective Gross Annual Income: |
(a) + (b) = (c) |
$ 22,800 |
| Taxe: |
|
$2,400 |
| Maintenance and Repairs (5%: |
|
$1,200 |
| Management Expenses (5%): |
|
$1,200 |
| Total Annual Operating Incom: |
(d) |
$4,800 |
| Net Annual Operating Incom: |
(c) - (d) = (e) |
$18,000 |
| Annual Debt Service (Annual P & I: |
(f) |
$14,794 |
Debt Coverage Ratio (Minimum of 1.10):
(Divide net annual operating income by the annual debt service) |
(e)/(f) = (g) |
1.21 |
Download Worksheets:
20% Down Mortgage (Rental Offset) Example:
Rental offset is when a lending institution uses 70% of the rental income and offsets it against the P.I.T. Only the shortfall will be included in the Debt Ratio. If there is a rental surplus this will be added to the client’s income. Assume a rental property in Calgary with P.I.T. of $1,432 and rental income of $2,000. We will take 70% of the $2000 income ($1,400) and deduct that from P.I.T. ($1,432). We will only add the $32 shortfall to the Debt Ratio.
Download Rental Offset Worksheet: