Interest rate volatility, policy changes, product variations and a general tightening in consumer lending are making this one of the most demanding and concerning times to finance residential real estate. Never before has it been more important to speak to a qualified mortgage specialist BEFORE you buy (or sell) a home.
The busy spring market is just around the corner and the housing markets in cities across Canada are beginning to heat up. It’s an exciting time for those thinking of buying their first home, moving out of a condo and into a house, or finding a cottage on their favorite lake. Yet most people thinking of buying have not taken the time to see how much they can buy, and under what conditions.
Canada’s lending environment has been the object of intense scrutiny over the past several months, with government Ministers, bank CEO’s, regulatory officials and a slew of economists voicing concerns about how (and how much) Canadian consumers are borrowing to buy or refinance their homes. Policies have been put under review, lending programs curtailed, and “special offer” rates given and then taken away within weeks. What does this mean for borrowers and homebuyers? It means this:
Don’t just get a quote on a rate – it means NOTHING. Get pre-qualified for a mortgage. Whether you own a home or not, or have lots of savings and income or not, it has never been more important.
Here’s why:
1) Policy changes. All the big banks and most smaller lenders (including brokers, who finance the majority of their deals through two or three big banks’ wholesale arms) are asking borrowers to provide a LOT more information in order to approve their financing.
Income requirements must be proven with more than a job letter or contract – you need to show Notices of Assessment for at least two years, current paystubs, and, in some cases, proof of pay being deposited into your account.
If you are using rental income to qualify for a purchase or refinance, be prepared to provide complete lease information (signed, initialed, with lessee information on the documents). Current homeowners will need to show their most recent mortgage statements and municipal tax bills.
Proving the liquidity of your downpayment has become increasingly important because of fraud concerns. Tracking where your downpayment came from means providing savings account or investment records that show the flow of funds through your accounts. If you are receiving some or all of your downpayment from relatives, basic Gift Letters may not be sufficient; the source of funds and transfer of funds to your custody – in advance of closing – must be documented.
The government program that allows you to use RRSP’s to purchase your first home also has restrictions – deposits must have been made at least 90 days before withdrawal, all buyers on the deal must be first-time owners, and so on. Know all the details about the RRSP program if you are hoping to take advantage of it.
Aside from documentation, the qualification itself may have changed. At some institutions, so-called “stated income” programs have been curtailed or abolished altogether. Where you once had to provide a notice of assessment to show you didn’t owe back taxes, you may now have to provide your tax returns to prove that you can in fact afford the purchase you are making. You may also need to prove your ability to repay by showing a large amount of savings (at least one bank requires self-employed or stated income borrowers to have THREE YEARS worth of monthly payments as savings!). Business for self or incorprated borrowers may need to show articles of incorporation, business account statements, and other documentation to support their business status.
2) Product changes – a lot of attention was given to record-low fixed rate mortgages over the past month, but many borrowers were unaware of the restrictive conditions that were involved with the deal. Bank profit margins are very thin right now so the pre-payment restrictions, duration of rate hold, and discharge penalty structures for some products may have changed. Be fully aware of all aspects of the particular product you are interested in before signing off on the deal.
3) Volatile Rates – five-year fixed-rates may have hit record lows but soon bounced back up off the “floor” they had established. Getting pre-qualified locks in a rate for you for an extended period (usually 90 to 120 days, depending on the institution and the rate offer) so that you know what you are going to be paying if you close a purchase by a certain time. Special offer rates can have much shorter windows, and if it is unreasonable to expect you will find, purchase, and close the deal on a home within a short period of time then the special offer rates may not be for you. Again, a qualified mortgage specialist should be able to provide a full explanation of how long your rate is held for, and should explain what will happen if you buy but close AFTER the rate expiry date (sometimes the hold can be extended, sometimes not – find out BEFORE you agree to a specific closing date in your offer of purchase!).
4) Property valuations – depending on where you live and where you plan to buy, the valuation of homes (for the purpose of calculating financing) may be more restrictive than you think. One way for lenders to protect their investments is to restrict how much they will lend on a property (loan-to-value ratio) OR restrict what kinds of properties they will lend on. Simply put, homes may not be appraised for the same value as they were purchased. There are many homes out there that have multiple kitchens, that have unfinished renovations, or that have uninsurable wiring (knob and tube), outer siding (insulbrick) or other construction, that has made lenders unwilling to finance them. Vacation properties that have lake-intake water supply are another example.
It is critical for borrowers to understand that just because you are approved to borrow, that doesn’t mean the property will be approved to borrow on. An experienced mortgage specialist should warn you that eligibility (because of construction) or over-valuation of a property (through multiple offers, for example) could result in the lender being unable to finance the property the way you expected.
Here’s an example: You get approved for a 300k purchase with 20% down (60k) for a total mortgage of $240k. You buy a house in multiple offers for $320k. The extra valuation may not seem like much to finance (an extra 4k down and 16k on a mortgage) – but then the bank values the home at only 280k (because of the multiple offers and the home itself). You are now only able to borrow 80% of 280k (224k). That means you need to provide a downpayment of $96000 (an extra $36k!!) OR have to re-qualify at a smaller downpayment and incur higher monthly payments – plus CMHC fees.
Buying a home is the biggest investment most Canadians will ever make. It affects everything – your savings, your financial plans, your family’s activities and your happiness. Take it seriously and speak to a qualified professional BEFORE you go out and start looking at homes, and especially do it before you make a legal offer to purchase (or sell) one. The pain and penalties of not being prepared can cost you thousands of dollars – and the opportunity of owning the home of your dreams.
Courtesy of Borrow Better
To understand the best mortgage options for you contact
Angela Calla Mortgage Team 604-802-3983 callateam@dominionlending.ca
