31 Oct

Mortgages for Expensive Homes – Not as Easy as it Sounds!

Mortgage

Posted by: Kelly Hudson

 Large home purchases that require a mortgage present unique challenges in the Canadian Mortgage market. Sliding scales, director approval, multiple reviews, it all adds up to difficultly getting larger mortgages approved, unless you’re working with an experienced mortgage broker.

In 2012 the government of Canada removed the mortgage insurers ability to approve mortgages of $1 million (or more) with less than 20% down payment. As a result of this change, the minimum down payment for homes over $1 million starts at 20% of your purchase price and increases.

Since any home purchase over $1 million cannot be insured against default, the lender applies a sliding scale to reduce their potential for loss if the borrower defaults.  Consequently, large mortgages present a unique challenge, especially in the Vancouver/Toronto market. 

Depending where you live, most lenders consider home purchases over $500-750K to be large enough for them to want to mitigate their risk.  In larger urban centres like Vancouver & Toronto, lenders will consider purchases up to $1 million before increasing the down payment with sliding scale.

Sample sliding scales for Vancouver/Toronto

  • 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
  • 20% down payment on $1,250,000, plus 50% down payment on the balance over $1,250,000
  • 20% down payment on $1,500,000 plus 40% down payment on the balance over $1,500,000

Every lender has their own risk level for expensive home purchases.

As you can see, the typical lender sliding scale for jumbo mortgages is very punitive and can result in a much higher down payment when purchasing a home over $1 million.

Lenders want to alleviate the higher risk on purchases of expensive homes, because there is a smaller pool of potential buyers compared to lower home prices. This makes expensive homes more vulnerable to market corrections.  If there is a price correction, it can be more difficult for lenders to get their money back, should they need to foreclose. 

Lenders are risk adverse!  When they perceive a risk, they are either going to charge higher interest rates OR lessen their risk with a sliding scale, requiring home buyers to put a larger down payment on properties over their threshold.

Example:

  • Base line with no sliding scale home purchase $1,500,000
    • Minimum 20% down payment = $300,000
  • Down payment required for a home purchase with Sliding Scale 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
    • 20% down payment on $1,000,000 = $200,000
    • 40% down payment on $500,000 (amount over $1M) = $200,000
      • Down payment required $400,000

20% down payment = $300K versus sliding scale $400K down payment required – Yes sliding scale can make a big difference in your required down payment!

Sliding scale is designed so that as a property’s price increases, you need a larger down payment. 

  • Therefore, the maximum loan/mortgage amount available decreases on a proportionate basis.

To minimize the size of your down payment, you need an experienced mortgage broker who works with a multitude of lenders, giving you the most flexibility with sliding-scale.

Other points to keep in mind with a large mortgage:

  • Pay attention to the terms and conditions of your mortgage, especially your prepayment penalties.
    • Larger loan amounts amplify the differences in the penalties charged by different lenders.
  • Most large mortgage loans must be escalated up the ranks for management approval. This means it can take lenders an extra day (or two) to get your approval back so your subject removal date may need to be longer.
    • Typically, I recommend 10 business days for subject removal on large mortgages.

 Another important point to keep in mind, when real estate prices flatten or drop, lenders can become much more conservative when underwriting higher-end real estate. As such, there can be wide disparity in the value different lenders will assign to a property.

Partnering with an independent mortgage broker will help ensure that you and your property are matched with the lender who is offering the best fit for your situation.

If you know anyone looking for a high-end home, who needs a mortgage, I can help them arrange the financing.   We’ll work together to figure out a budget and down payment (based on sliding scale).  Then, we will work with a lender for a pre-approval, so we have a clear picture for affordability.  BLOG Pre-Approved for Your Mortgage…  What Does that Really Mean???

Mortgages are complicated, especially over $1 million… you need to engage an expert!!!   Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Broker
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

 

7 Oct

Mortgages 101 – What You Need to Know about Mortgages

Mortgage

Posted by: Kelly Hudson

  Mortgage [ˈmôrɡij] NOUN

With a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home’s occupants and sell the house, using the income from the sale to clear the mortgage debt.

Mortgages are complicated, but they don’t have to be… let me break down the basics for you.

Mortgages in a Nutshell

Since homes are expensive, a mortgage is a lending system that allows you to pay a small portion of a home’s cost (called the down payment) upfront, while a bank/lender loans you the rest of the money. You arrange to pay back the money that you borrowed, plus interest, over a set period of time (known as amortization), which can be as long as 30 years.

When you get a mortgage loan, you are called the mortgagor. The lender is called the mortgagee.

How Do You Get a Mortgage?

The companies that supply you with the funds that you need to buy your home are referred to as “lenders” which can include banks, credit unions, trust companies etc.

Mortgage lenders don’t lend hundreds of thousands of dollars to just anyone, which is why it’s so important to maintain your credit score. Your credit score is a primary way that lenders evaluate you as a reliable borrower – that is, someone who’s likely to pay back the money in full WITHOUT a lot of hassle. A score of 680-720 or higher generally indicates a positive financial history; a score below 680 could be detrimental, making you a higher risk.  Higher risk = higher rates!

For more information about Credit check out Solving the Puzzle – 5 factors used in determining your Credit Score

How Mortgages Are Structured

Down payment:   This is the money you must put down on a home to show a lender you have some stake in the home.  Ideally you want to make a 20% down payment of the price of the home (e.g., $60,000 on a $300,000 home), because this will allow you to avoid the extra cost of Mortgage Default Insurance which is mandatory with all down payments of less than 20%.  5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

Every mortgage has three components: the principal, the interest, and the amortization period.

Mortgages are typically paid back gradually in the form of a monthly mortgage payment, which will be a combination of your paying back your principal plus interest.

  1. Principal: This is the amount of money that you are borrowing and must pay back.  This is the price of the home minus your down payment
    • taking the above example, purchase price $300,000 minus $60,000 down payment to get a mortgage (principal) of $240,000.
  1. Interest rate: Lenders don’t just loan you the money because they’re nice guys.  They want to make money off you, so you will be paying them back the original amount you borrowed (principal) plus interest—a percentage of the money you borrow.
    • The interest rate you get from the lender will vary based on:  property, lender, credit bureau, employment and your personal situation.
  1. Amortization means life of the mortgage, or how long the mortgage needs to be, in order to pay off the complete loan (principal) plus interest. Mortgage loans have different “amortizations,” the two most common terms are 25 & 30 years.
    • Within the life of the mortgage (amortization) you will have a Term. The length of time that the contract with your mortgage lender including interest rate is set up (typically 5 years). After your term completes, you can renew your mortgage with the same lender or move to a new lender.

When to Get a Mortgage

First Step:  connect with a Mortgage Broker for a mortgage before you start hunting for a home.  You need to know what you can afford – especially with all the new government regulations.

Ideally you need a mortgage pre-approval, which an in-depth process where a lender will check your credit report, credit score, debt-to-income ratio, loan-to-value ratio, and other aspects of your financial profile.

This serves two purposes:

  1. It will let you know the maximum purchase price of a home you can afford.
  2. A mortgage pre-approval shows home sellers and their realtors that you are serious about buying a home, which is particularly crucial in a hot housing market.

Another easy first step? Before you start browsing online listings or visiting open houses, plug your info into my online home affordability calculator, which will give you an idea of how much mortgage you can qualify for.

Types of Mortgages

How do you figure out which mortgage is right for you? Here are the 2 main types of home loans to consider:

  1. Fixed-rate mortgage:This is the most popular payment setup for a mortgage. A fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage.
  2. Variable rate mortgage aka Adjustable Rate Mortgages (ARM) A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions and the Canadian economy. A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the term. These types of mortgages usually start off with a lower interest rate but can subject the borrower to payment uncertainty.
  3. Check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

How to Shop for a Mortgage?

Use a mortgage broker, a professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.  BLOG What is the difference between a Mortgage Broker & a Mortgage Specialist (hint – specialists work for the bank)!!

I specialize in Mortgage Intelligence, educating people about mortgages, how they work and what lenders are looking for.  Everyone’s home purchasing situation is different, so working with me will give you a better sense of what mortgage options are available based on the 4 strategic priorities that every mortgage needs to balance:

  • lowest cost
  • lowest payment
  • maximum flexibility
  • lowest risk

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product. Although sometimes that is true, a mortgage is more than just an interest rate. You can save yourself a lot of money if you pay attention to the fine print, not just the rate.

Banks tend to concentrate on the 5 year fixed mortgage rate (since that’s the best option for them)… rates are important, however I look at the total cost of the mortgage.  I will advise & explain mortgage options, help you understand the implications of your choice and help you avoid the pitfalls of choosing a mortgage based on rates alone.

My services for a typical mortgage are FREE (I get a finder’s fee from the lender) and I help people save money.  I LOVE my job!

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

4 Sep

Everything You Need to Know About the First-Time Home Buyer Incentive

Mortgage

Posted by: Kelly Hudson

On Sept. 2, 2019, the Canadian federal government launched the new First-Time Home Buyer Incentive (FTHBI).   The intent of the plan is to help makes mortgages more affordable for qualified first-time home buyers.  The government has allocated $1.25 billion over three years for the First-Time Home Buyer Incentive.  Mortgages approved under the program can close Nov. 1, 2019 or later.

The FTHBI will start providing interest-free shared-equity loans to interested home buyers in the form of down payment assistance.  The federal government will help with your down payment in exchange for an equity share in your home.

How the program works:

Participants must put down at least 5% of the home’s value with their own money, while the government (through the Canada Mortgage and Housing Corporation) would contribute an additional 5% of the down payment if the purchase is of an existing home, or 10% if it’s a new build.

Home buyers don’t need to make any monthly payments (principal or interest) on FTHBI, and the loan must be repaid after 25 years or when the home is sold.

The CMHC shares proportionately in any future gains or losses in home value.

How does this help you as a first-time buyer?

The additional down payment from FHTBI helps reduce your mortgage default insurance premium, and lowers your monthly mortgage payments, which can result in significant savings over the life of your mortgage.

Who is eligible for the Incentive? To qualify for the Incentive, the following must apply:

  • The Home buyer’s total qualifying annual income shall be no more than $120,000.
  • If there is more than one Home buyer, the combined qualifying annual income shall be no more than $120,000.
  • Examples of qualifying annual income include salary before taxes and investment income
  • Total borrowing is limited to no more than 4 times the qualifying income. The combined first insured mortgage and Incentive amount cannot exceed four times the total qualifying income. If there is more than one Home buyer, the combined borrowing is limited to no more than 4 times the combined qualifying income.
  • The Home buyer must be a Canadian citizen, permanent resident or non-permanent resident who is legally authorized to work in Canada.
  • At least one Home buyer (if more than one on title) must be a first-time Home buyer, as per the definition below:
    • they have never purchased a home before; or
    • in the last 4 years, they did not occupy a home that they or their current spouse or common-law partner owned; or
    • they are experiencing a breakdown of a marriage or common-law partnership (in certain cases, even if/when the other first-time Home buyer requirements are not met).

What Kind of Property Can I Purchase?

The mortgage of a property cannot exceed more than four times the maximum household income of $120,000, which caps out at $480,000. This means the highest price for a home available to be purchased through this program will be between $500,000 and $575,000, depending on the size of your down payment.

Sadly, if you’re looking to purchase property in a city like Vancouver or Toronto, it won’t be a house. Pricing in these markets is competitive and the cost of a home is steep. In July 2019, the average price of a home in Vancouver was $826,165 and in Toronto, $982,427, Bloomberg reports.

CMHC President and CEO Evan Siddall has responded to criticism over the effectiveness of the program in these markets by saying: “No program is going to work as well in higher-priced markets. Using 2018 data, 2,300 home buyers would have qualified in Toronto and 1,100 in Vancouver. Around 25% of home sales in Toronto in 2018 were for homes under $500K and 17% in Vancouver.”

The CMHC expects 100,000 home buyers to participate in the program over the next three years.

How Much Will This Program Save Me?

If a family is looking to purchase a new $500,000 home with a $25,000 down payment, this program could save them as much as $286 per month or more than $3,430 a year. This statistic will change depending on the type of home purchased, amount of FTHBI (5% or 10%) and in which market it is bought.

How Do I Apply?

Work with your mortgage broker to complete and sign the application documents. Your mortgage broker will submit the application to the Program Administrator on your behalf and at your request.

  • Your mortgage broker will notify you if you have been approved for the Incentive under the FTHBI program and work with you to complete the next steps.

 Restrictions

  • The mortgage must be insured with Mortgage Default Insurance
  • It’s only available to first-time buyers with a household income under $120,000
  • Participants must have a minimum 5% down payment
  • Household income cannot exceed $120,000 per year
    • Something to consider is that if you choose not to use the FTHBI program, with the same income of $120,000 your maximum purchase price would be higher. Allowing for property taxes and heat, your purchase price would be approximately $575,000.

Additional Information

The government’s contribution to your down payment will be registered as a second mortgage against your home

  • There will be an additional charge at the lawyer’s for registering the equity share against the title of your home. You will need to get a quote from your specific legal representative (estimated around $200)
  • When it comes time to repay the equity share, an appraisal will be required to determine the current value of your home, so there will be the cost of the appraisal to cover.

Repayment of the government’s share is triggered by either the sale of your home or when you hit the 25 years.

Other Programs to Help Homeowners

Government of Canada Programs to Support Home buyers check out the link for programs that government offers to help home buyers

  • Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home. The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.

Resources

Legal Documents and Forms

To learn more and apply for the First-Time Home Buyer Incentive, visit www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

 Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

7 Aug

Need an Appraisal – 7½ Tips for Success

Mortgage

Posted by: Kelly Hudson

Do you need to get a current value of your property?  Then you are going to need an appraisal.

Banks and other lending institutions want to know the “current” market value of your home before they consider loaning money on the property.  An appraiser checks the general condition of your home and compares your home to other similar homes which have recently sold in order to define a comparable market value for your home.

Here are 7½ tips that can help you get top current market value

Short version – Prepare your home as if it was going to be sold!!

Long version… If a picture is worth a thousand words, think what kind of story the pictures from your home are telling?

In the world of mortgages, lenders seldom set foot on the property before making a loan decision.

Instead, they rely on their trusted list of approved appraisers.  All a lender usually gets is the appraiser’s pictures of your property and their comments about how your home was appraised.

Tip #1  Clean up.  The appraiser is basing the value of your property on how good it looks. Before the appraisal, prepare your home as if you’re selling it. Clean and declutter every room, vacuum, and scrub. Do whatever you can to make your home as presentable as possible.
Tip #2 – Pay attention to curb appeal. An appraisal is all about first impressions. And the very first one the appraiser gets is when they walk up to your property. Spend an hour or two making sure the outside of your house, townhouse or condo is warm and welcoming.

Tip #3 – The appraiser must be able to see every room of the home, no exceptions.  Refusal to allow an appraiser to see any room will be noted in the appraisal can be a game stopper.   There are times when it is not appropriate for the appraiser to take pictures of certain things and appraisers and lenders understand this, but refusal to grant access could kill your deal.

Tip #4 – Make a list of upgrades and features.  It’s important that the appraiser is made aware of any updates you’ve made, especially those which are hidden, like new plumbing and electrical. If possible, give the appraiser this list. That way they have a reference as to what has been updated and how recent or professional that work was done.

Tip #5 – If you need to spend to update, be prudent. Many people think “bathrooms and kitchens” are the answer for getting high prices on home value. They aren’t. First, consider that kitchen and bathroom remodels can be some of the priciest reno costs. For that reason, it may be more prudent to spend a bit of money, for just a bit of updating. Paint, new flooring, new light or plumbing fixtures don’t break the bank, but can provide a dramatic impact and improve your homes value.

Tip #6 – You know your neighbourhood better than your appraiser does. Find out what similar homes in your neighbourhood have sold for. Your property might look like one down the street, but if you believe the value of your property is worth more, let them know why.

Tip #7 – Lock up your pets.  I’m sure most appraisers like pets, but some may be put off by your cat rubbing against their leg or the dog barking or following them around.

Tip #7½One last tip – don’t annoy the appraiser with questions and comments and follow them around. Instead, simply be prepared to answer any of their questions and, if you do have concerns or queries, wait until they’ve completed their viewing of the property, then ask.

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com 
www.KellyHudsonMortgages.com

8 Jul

20 Terms that Home Buyers Need to Know

Mortgage

Posted by: Kelly Hudson

Buying a home is one of the most important financial decisions you will make.

It’s common for a first-time home buyer to be overwhelmed when it comes to real estate industry jargon, so this BLOG is to help make some of the jargon understandable.

To help you understand the process and have confidence in your choices, check out the following common terms you will encounter during the home buying process.

  1. Amortization – “Life of the mortgage” The process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.  Typical amortizations are 25 years or if you have over 20% down payment – 30 years.
  2. Appraisal An estimate of the current market value of a home.  A property is appraised to know the amount of money that a lender is willing to lend for a buyer to buy a particular property. If the appraised amount is less than the asking price for the property, then that piece of real estate might be overpriced. In this case, the lender will refuse to finance the purchase.  Appraisals are designed to protect both the lender and buyer. The lender will not get stuck with a property that is less than the money lent, and the buyer will avoid paying too much for the property.
  3. Closing Costs – Costs you need to have available in addition to the purchase price of your home. Closing costs can include: legal fees, taxes (GST, HST, Property Transfer Tax (PTT) etc.),  transfer fees, disbursements and are payable on closing day. They can range from 1.5% to 4% of a home’s selling price.  Don’t Forget the Closing Costs When You Purchase a Home
  4. Co-Signer A person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.  Would a Co-Signer Enable You to Qualify for a Mortgage?
  5. Down Payment – The portion of the home price that is NOT financed by the mortgage loan. The buying typically pays the down payment from their own resources (or other eligible sources) to secure a mortgage.  5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home
  6. Equity – The difference between the price a home could be sold for and the total debts registered against it (i.e. mortgage). Equity usually increases as the mortgage is reduced by regular payments. Rising home prices and home improvements may also increase the equity in the property.
  7. Fixed Interest Rate – a fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage. Fixed vs. Variable Rate Mortgages – Pros & Cons
  8. Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) 
    • GDS – Typically mortgage lenders only want you spending a maximum 35-39% of your gross income on your mortgage (principle & interest), property taxes, heat and 50% of your strata fees.
    • TDS – typically, lenders want you spending a maximum 39-44% of your gross income on your GDS – PLUS any other debt obligations you have (credit card debt, car payments, lines of credit & loans). 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada
  9. High-ratio mortgage / Conventional Mortgage – a high ratio mortgage is a mortgage loan higher than 80% of the lending value of the home. A conventional mortgage is when you have more than 20% down payment. In Canada, if you put less than 20% down payment, you must have Mortgage Default Insurance (see below) and your mortgage affordability (GDS & TDS) is “stress tested” with the Bank of Canada’s qualifying rate (currently 4.64%).
  10. Interest Rate – This is the monthly principal and interest payment rate.
  11. Mortgage – A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.
  12. Mortgage Broker – A professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.  What is the difference between a Mortgage Broker & a Mortgage Specialist (hint – specialists work for the bank)!!
  13. Mortgage Default Insurance – Is required for mortgage loans with less than a 20% down payment and is available from Canadian Mortgage & Housing Corp. (CMHC) or 2 other private companies. This insurance protects the lender in case you are unable to fulfil your financial obligations regarding the mortgage.  Everything You Wanted to Know about Mortgage Default Insurance
  14. Open / Closed Mortgage 
    • An open mortgage is a flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term, because of the flexibility the interest rates are higher.
    • Closed mortgages typically cannot be paid off in whole or in part before the end of its term. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment. If you try and “break your mortgage” or if any prepayments are made above the stipulated allowance the lender allows, a penalty will be charged. Mortgage Penalties – Ouch… How Much??
  15. Pre-Approval – A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines. Pre-Approved for Your Mortgage… What Does that Really Mean???
  16. Refinance – Refinancing is the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.
  17. Term (Mortgage) – Length of time that the contract with your mortgage including interest rate is fixed (typically 5 years)
  18. Title – The documented evidence that a person or organization has legal ownership of real property.
  19. Title Insurance – Insurance against losses or damages that could occur because of anything that affects the title to a property. Insurance Title insurance is issued by a Title Company to insure the borrower against errors in the title to your property.
  20. Variable Rate Mortgage or Adjustable Rate Mortgage (ARM) A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions, the Canadian economy. A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. These types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty. Fixed vs. Variable Rate Mortgages – Pros & Cons

For additional information about mortgages – check out Check out Kelly’s AWESOME First Time Home Buyer Guide!!

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

3 Jun

Credit Cards for the Credit Challenged

Credit

Posted by: Kelly Hudson

If you want to buy a home and don’t have a bucket load of cash – you are going to need a mortgage.

In order to get a mortgage, you are going to need credit…

When you get a mortgage, banks lend you “their” money and secure the loan against the property you are buying.  Therefore they want to know how you’ve handled credit in the past.

  • Bad credit = high interest rates
  • Really bad credit = NO mortgage

If you have bad credit, you need to improve your credit to get a mortgage/better interest rates.

When you have had credit challenges – you are going to be limited with the number of credit card companies willing to offer you credit.

In order to buy something on credit, most lenders follow the Rule of 2

  • 2 lines of credit (credit card, line of credit, loan etc.)
  • Minimum credit limit $2000
  • 2+ years (24+ months) history

One of the quickest ways to rebuild your credit is to get 2 credit cards.

Since you’ve had credit blemishes in the past, many credit card companies aren’t interested in giving you more credit.

  • If you have had any files that have gone to collections, you MUST pay those off ASAP.

One way to get a credit card for the credit challenged, is to get a secured credit card.

DEFINITION of Secured Credit Card

  • secured credit card is a credit card that requires a security deposit. Secured credit cards are generally for individuals whose credit is damaged or who have no credit history at all.
  • secured credit card works just like a traditional credit card. A secured credit card can help you establish or rebuild your credit.
  • The security deposit will depend on your previous credit history and the amount deposited in the account.
  • Security deposits for secured credit cards tend to range between 50% and 100%.
  • The security deposit can not be used to pay off the balance on the credit card.
  • Typically, secured credit card companies will increase the limit on your card once you have proved you are a good credit risk. This takes time. With continued good credit history over a few years, they will refund your security deposit and issue you a regular credit card.

Five Tips for Wisely Using a Secured Credit Card

  1. Use for small purchases you can pay off each month.
    • The point of using a secured credit card is to show your ability to responsibly charge and then pay off your balance.  To do this, make a few purchases each month and pay your bill in full.  By NOT carrying a balance you avoid paying interest & build your credit.
  2. Pay on time, and more than the minimum payment.
    • To get a healthy credit score – it is essential that you pay on time.  Ideally you want to pay off your balance in full.  If you can’t pay the full amount, pay down as much as you can, so you are reducing your credit utilization (the amount you owe compared to your credit limit).
  3. Make Multiple Payments every month.
    • Making more than one monthly payment can help keep your balance low.  A large balance reduces your overall credit which can negatively affect your credit score.  If you make a large purchase, pay it off quickly to keep your credit utilization low.
  4. Set Payment Alerts.
    • Even the most organized person misses a payment now and then… That’s OK for people with good credit… if you have credit blemishes you’ve lost your “get out of jail free” privilege.  One missed payment is one time too many!  Set up payment reminders 1 week before your payment is due.
  5. Enroll in Autopay.
    • If you are concerned about making your payments on time?  The easiest plan is to enroll in autopay, which allows your credit issuer to automatically deduct the monthly balance form your bank account, so you don’t have to keep track of bills. This assumes you have the money in the account to pay off the credit card.

I’ve worked with many clients that have had credit issues.  My clients have had success with Capital One Secured MasterCard and Canadian Tire cards.

For other options, check out this BLOG I found Top 6 Secured Credit Cards for Canadians

Please note: Prepaid Credit Cards do NOT help you build credit.  You’ve prepaid the amount on the card, so no one is actually offering you any credit. 

Need more information about credit… check out my BLOGs

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com 
www.KellyHudsonMortgages.com

1 May

Would a Co-Signer Enable You to Qualify for a Mortgage?

Mortgage

Posted by: Kelly Hudson

There seems to be some confusion about what it actually means to co-sign on a mortgage… and any time there is there is confusion about mortgages, it’s time to chat with Kelly Hudson, your trusted mortgage expert!!

Let’s take a look at why you would want to have someone co-sign your mortgage and what you need to know before, during and after the co-signing process.

Qualifying for a mortgage is getting tougher, especially with the 2017 government regulations. If you have poor credit or don’t earn enough money to meet the banks requirements to get a mortgage, then getting someone to co-sign your mortgage may be your only option.

The new ‘stress test’ rate is especially “stressful” for borrowers.  As of Jan. 1, 2018 all home buyers need to qualify at the rate negotiated for their mortgage contract PLUS 2% OR the government posted rate 5.34% (this rate varies) which ever is higher.  If you have less than 20% down payment, you must purchase Mortgage Default Insurance and qualify at 5.34%.

The stress test has decreased affordability, and most borrowers now qualify for 20% less home.

In the wise words of Mom’s & Dad’s of Canada… “if you can’t afford to buy a home now, then WAIT until you can!!” BUT… in some housing markets (Toronto & Vancouver), waiting it out could mean missing out, depending on how quickly property values are appreciating in the area.

If you don’t want to wait to buy a home, but don’t meet the guidelines set out by lenders and/or mortgage default insurers, then you’re going to have to start looking for alternatives to conventional mortgages, and co-signing could be the solution you are looking for.

In order to give borrowers, the best mortgage rates, Lenders want the best borrowers!! They want someone who will pay their mortgage on time as promised with no hassles.

If you can’t qualify for a mortgage with your current provable income (supported by 2 years of tax returns and a letter of employment) along with solid credit, your lender’s going to ask for a co-signer.

Ways to co-sign a mortgage

  1. The first is for someone to co-sign your mortgage and become a co-borrower, the same as a spouse or anyone else who you are actually buying the home with. It’s basically adding the support of another person’s credit history and income to those initially on the application. The co-signer will be put on the title of the home and lenders will consider them equally responsible for the debt should the mortgage go into default.
  2. Another way that co-signing can happen is by way of a guarantor. If a co-signer decides to become a guarantor, then they’re backing the loan and essentially vouching for the person getting the loan that they’re going to be good for it. The guarantor is going to be responsible for the loan should the borrower go into default.

Most lenders prefer a co-signer going on title, it’s easier for them to take action if there are problems.

More than one person can co-sign a mortgage and anyone can do so, although it’s typically it’s the parent(s) or a close relative of a borrower who steps up and is willing to put their neck, income and credit bureau on the line.

Ultimately, as long as the lender is satisfied that all parties meet the qualification requirements and can lessen the risk of their investment, they’re likely to approve it.

Before signing on the dotted line

Anyone that is willing to co-sign a mortgage must be fully vetted, just like the primary applicant. They will have to provide all the same documentation as the primary applicant. Being a co-signer makes you legally responsible for the mortgage, exactly the same as the primary applicant. Co-signers need to know that being on someone else’s mortgage will impact their borrowing capacity while they are on title for that mortgage. They’re allowing their name and all their information to be used in the process of a mortgage, which is going to affect their ability to borrow anything in the future.

If someone is a guarantor, then things can become even trickier the guarantor isn’t on title to the home. That means that even though they’re on the mortgage, they have no legal right to the home itself. If anything happens to the original borrower, where they die, or something happens, they’re not really on the title of that property but they’ve signed up for the loan. So they don’t have a lot of control which can be a scary thing.

In my opinion, it’s much better for a co-signer to be a co-borrower on the property, where you can actually be on title to the property and enjoy all of the legal rights afforded to you.

The Responsibilities of Being a Co-signer

Co-signing can really help someone out, but it’s also a big responsibility. When you co-sign for someone, you’re putting your name and credit on the line as security for the loan/mortgage.

If the person you co-sign for misses a payment, the lender or other creditor can come to you to get the money. The late payment would also show up on your credit report.

Because co-signing a loan has the potential to affect both your credit and finances, it’s extremely important to make sure you’re comfortable with the person you’re co-signing for. You both need to know what you’re getting into. I recommend looking into Independent Legal Advice between all co-borrowers.

Co-signing is NOT a life sentence

Just because you need a co-signer to get a mortgage doesn’t mean that you will always need a co-signer.

In fact, as soon as you feel that you’re strong enough to qualify without your co-signer – you can ask your lender to reconsider your application and remove the co-signer from the title. It is a legal process so there will be a small cost associated with the process, but doing so will remove the co-signer from your loan (once you are able to qualify on your own), and release them from the responsibility of the mortgage.

Removing a co-signer technically counts as changing the mortgage, so you need to check with your mortgage broker and lender to ensure that the lender you choose doesn’t count removing a co-signer as breaking your mortgage, because there could be large penalties associated with doing so. For more information, check out Mortgage Penalties – Ouch… How Much??

Co-signing is an option that could help a lot of people buy a home, especially first time home buyers who are typically starting their career and building their credit bureau.

A final mortgage tip: a couple of alternatives to co-signing that could help someone out:

  • providing gift funds for a down payment
  • paying off someone else’s debt, giving them more funds to pay the mortgage

Are you looking at buying a home? As you can tell there is lots to discuss, give me a call and let’s have a chat!

Kelly Hudson
Mortgage Expert
Dominion Lending Centres – Canadian Mortgage Experts
Mobile: 604-312-5009 
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

30 Apr

How to Pick the Best Mortgage for YOUR Situation!

Mortgage

Posted by: Kelly Hudson

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product. Although sometimes that is true, a mortgage is much more than just an interest rate. You can save yourself a lot of money if you pay attention to the fine print for the total cost of your mortgage.

In order to pick the best mortgage, you need to understand your options. This comes with Mortgage Intelligence, understanding how mortgages work and the pros and cons of the various options.

Once you’ve selected the type of mortgage, then you’ll need to shop for the most competitive option available to you and that means making some decisions based on your specific situation including:

  • Are you planning to move in the next 5 years
  • Will your family be growing/shrinking?
  • Will your employment change and if it does will you need to relocate?
  • Would $1000’s in penalties impact you if you need to break your mortgage?
  • What types of debts do you have?  Credit cards? Car loan? Student loan? Line of Credit?

Why do all this work? Because it will have a direct impact on your bottom line. A mortgage is made up of two parts—the principal and interest—you need to pay attention to how and when these parts get paid down. Ideally, you want to minimize your interest payments and maximize the principal payments.

New Government Stress Test Jan. 1, 2018 – whichever is the highest is how you must qualify for a mortgage.

  • Qualify at the Chartered Bank Benchmark Rate (Government Rate) which fluctuates (currently 5.34%)
  • OR the contract rate your lender gives you PLUS 2% i.e. 3.69% + 2% = 5.69%
    • Since 5.69% is the highest – that would be the stress tested rate.

What this means to you is… if you have to qualify for a mortgage at a rate about 2% higher than the lender is giving you, your buying power decreases by about 20%. 

To pick the best formula for your situation, you’ll first need to understand some of the factors that impact how much interest you’ll pay for your mortgage loan.

Understanding these 6 mortgage terms will help you make the best decision for your situation

Amortization

Amortization is a fancy word that means the “life of your mortgage” OR how long it takes to pay off your mortgage if you paid your mortgage for “X” years.  The amount of your mortgage loan repayment is calculated based on a length of time you agree to paying off that debt.  In Canada, the standard amortization period is 25 years.

Picking the best mortgage is not just about qualifying for the mortgage. The amortization period is integral in the best mortgage decision because it will decide how much or how little interest you will pay during the life of the mortgage loan.

  • The longer the amortization period (25 years vs 30 years) the more interest you will pay.
  • Therefore, a shorter amortization period will lower your overall cost of borrowing BUT you must be able to afford the higher payments.

Once you’ve decided on your amortization, you will need to decide if how frequently you would like to make your mortgage payments.  Every mortgage payment (consisting of both interest and principal) will help reduce your principal (the amount of money you borrowed) and eventually reduces the overall interest you pay on this loan.

Term

In the 1980’s mortgage interest rates were as high as 22%.  Interest rates can change over time therefore, lenders don’t want to negotiate a 25-year loan at 4% interest if the interest rates go up to 10% in 5 years. To avoid the risk, lenders break your mortgage amortization into smaller terms.

  • The term is shorter than the amortization period and locks you into your pre-negotiated rates during that time.
    • The length of term you choose (most Canadians choose 5 years) will depend partly on if you think interest rates will rise or fall. Typical terms are: 1, 2, 3, 4, 5, 7 & 10.

About 3-6 months before your current term matures, your current lender usually sends you a renewal notice with options on rates for the various terms they offer (typically 1 to 10 years).

Once you get your renewal notice, you need to contact your mortgage broker to ensure you’re choosing the best option for your situation.

Closed Mortgage

A closed mortgage usually offers the lowest interest rates available.

Closed mortgages cannot be paid off before the end of its term without triggering a penalty. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment.

Open Mortgage

An open mortgage is a more flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term without penalty, because of the flexibility the interest rates are higher.

  • The interest rates for an open mortgage are typically 3-4% higher than a closed rate mortgage.
  • i.e. a home buyer could pay 6.99% for a 5-year open mortgage vs. 3.99% for a five-year closed mortgage.

If you plan to sell your home soon or expect a large sum of money, an open mortgage can be a great option.  Most lenders will allow you to convert from an open to a closed mortgage at any time (and switch you to lower rates).

Fixed mortgage – you have the same payment for the term of the mortgage

Variable mortgage – the mortgage rate and your monthly payments will vary depending on the Bank of Canada rate (Prime)

Fixed vs. Variable Pros & Cons (in a nutshell) for more information check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

Fixed Rate:

  • Pro – you would have the same mortgage payment for the entire term of the mortgage
    • Your mortgage payments are not affected by Bank of Canada Rate or Canadian Bond Yield
    • Think of fixed rate as an insurance policy – you pay a premium to guarantee “fixed” rates for the balance of the term
  • Pro – can port a fixed mortgage
  • Con – higher interest rates
  • Con – MUCH higher penalties if you need to break your mortgage (can be 4-5% of outstanding balance with Banks/Credit Unions)
    • 60% of home owners, break their mortgage before it matures!  There are penalties to break your mortgage, click on this GREAT 3 minute video from the Globe & Mail explaining how Banks calculate mortgage penalties for both Variable & Fixed mortgages and how banks squeeze even more money out of their clients by giving discounts off their inflated posted rates Drawing Conclusions: How much does it cost to break a mortgage?

Variable Rate:

  • Pro – lower rates than the Fixed Rate – you would pay less now that you would for a Fixed Rate mortgage
  • Pro – Penalty for breaking is 3 months interest (about 0.5-1% of outstanding balance).
  • Pro – you can lock into a fixed rate mortgage (assuming your mortgage is in good standing) at any time, based on the amount of time remaining on your mortgage and the current posted rates.
    • i.e. If you have a 5-year variable mortgage and you want to move to Fixed after 2 years, you would lock into the lenders current 3 year fixed posted rate
  • Pro/Con – porting is a little more complicated with a variable rate mortgage – it will depend on the lender and if you are adding more funds to the mortgage.
  • Con – Mortgage payments will increase/decrease based on the Bank of Canada rate – currently 1.75% and the lenders prime rate = Prime is currently 3.95%
    • Bank of Canada meets 8 times a year
    • Every 0.25% increase with the lender Prime rate will cost you an extra $13/$100,000 borrowed.  i.e. $300K mortgage = will be about $39/month more/less

BLOG 10 Helpful Words to Know when Buying a Home

The best way to decide on the best mortgage is to contact your friendly neighbourhood mortgage broker.  Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

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Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

9 Apr

7 Steps to Buying a Home

Mortgage

Posted by: Kelly Hudson

I’ve created a 7-step checklist to help you understand the home buying process

Step 1: Down Payment

The hardest part to buying a home is saving the down payment (a gift from the Bank of Mom & Dad also works).

  • For purchases under $500K, minimum down payment is 5%.
  • Buying between $501-999K you need 5% on first $500K PLUS 10% down payment for anything over $500K.
  • Buying a home over $1M you need 20% down payment.

BLOG 5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

For any home purchases with less than 20% down payment, you are also required to purchase Mortgage Default Insurance.  BLOG Everything You Wanted to Know about Mortgage Default Insurance

Step 2: Strategize, Define Your Budget and get Pre-Qualified

Unless you can afford to buy a home, cash in hand, you are going to need a mortgage.

You need to get pre-qualified, which should not be confused with the term pre-approved.

The big difference is that no approval is ever given by a lender until they have an opportunity to examine the property that you wish to purchase.  The bank may love you… but they also must love the property you want to buy.

Pre-qualifying will focus on gathering documentation to prove the information on your mortgage application including credit, debt load, income/employment, down payment etc.

BLOG Pre-Approved for Your Mortgage…  What Does that Really Mean???

Mortgage brokers will make sure you get a great mortgage rate.  Just as important as rates are the terms of your mortgage which should include:

We also discuss what type of mortgage fits your current situation

  • fixed vs variable?
  • life of the mortgage (amortization) 25 or 30 years etc.
  • payments – monthly, semi monthly, accelerated bi-weekly

Step 3: Set Your Budget

Keep in mind that just because you’re pre-qualified for a certain amount of mortgage, doesn’t mean you can actually afford that amount. Prepare your own monthly budget to be sure.

Typically, your total home payments (including mortgage, property taxes, strata fees & heat) should not exceed 32-39% of your gross (pre-tax) income.

Step 4:  Find the Right Property – Time to Engage a Realtor

Once you have been pre-qualified for a mortgage, based on your budget… you need to find a realtor.

Selecting the right real estate agent is a very important step in the home buying process.  When you work with an agent, you can expect them to help you with many things, including:

  • Finding a home
  • Scheduling tours of homes
  • Researching the market, neighbourhood and home itself
  • Making and negotiating your offer to purchase, and counter-offers
  • Providing expert advice on home buying
  • Handling the offer, gathering documentation and closing paperwork

I recommend interviewing at least 3 realtors.  You will quickly decide who has your best interests in mind.  Do you want to deal directly with a realtor who’s going to work with directly when you go home hunting, or do you want to deal with a BIG name realtor, who has buyers & sellers realtors working under them?  There are advantages to each – you need to decide what is the best fit for your situation.

Get referrals for realtors from friends and family… OR ask me, I have a group of realtors that I know and trust.

Step 5:  Mortgage Approval

Once you have found the property you would like to call home, your mortgage broker will send your mortgage application and property information to the lender who is the best fit for your situation, based on your input.

If the lender likes your financial situation and the property, they will issue a “commitment” letter outlining the terms of the mortgage.  The lender will send you a list of documents, so they can verify and validate all the information you told them on the mortgage application.

Step 6:  Time for the Solicitor (Lawyer or Notary)

Once the lender has reviewed and approved all your mortgage documentation and the property documentation, your file will be sent to your solicitor (in BC you can use a lawyer or notary).  They will process all the necessary title changes and set up a time for you to meet, review mortgage documents and sign.

Step 7:  Get the Keys

On the closing day the documentation for your home purchase will be filed at the land titles office by your solicitor.  Typically, the possession date is 1 or 2 days later, giving time for the money (down payment & mortgage) to get to the home seller.  On possession day you set up a time to meet with your realtor to get the keys.

Congratulations you’re done – you now own your home!!

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

13 Feb

5 Reasons Why You Don’t Qualify for a Mortgage

Mortgage

Posted by: Kelly Hudson

It’s not just because of finances

As a mortgage broker I receive calls from people who want to know how to qualify for a mortgage.   Most of the time it comes down to finances but there are other reasons as well.

Here are the 5 most common reasons why your home mortgage loan application could be denied: 

1.  Too Much Debt

When home buyers seek a mortgage, the words “debt-to-income ratio” quickly enters into the vocabulary, and it’s not without reason. Too much debt is a red flag to lenders, signifying you may not be able to handle credit responsibly.

Lenders will analyze how much debt you carry and what percentage of your income it takes to pay your debt. Debt ration is just as important as your credit score and payment history.

Two affordability ratios you need to be aware of:

  • Rule #1 – GROSS DEBT SERVICE (GDS) Your monthly housing costs are generally not supposed to exceed 32% of your gross monthly income.  
  • Rule #2 – TOTAL DEBT SERVICE (TDS) Your entire monthly debt payments should not exceed 42% of your gross monthly income.

Check out my BLOG 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada

If you don’t have a good debt to income ratio, don’t give up hope. You have options available including lowering your current debt levels and working with your Mortgage Broker. 

2. Poor Credit History

Some people don’t realize if they are late on their credit card/loan/mortgage payments the lender sends that information to the credit bureaus.

  • Late/non payments on your credit report will make your score drop like a rock
  • Exceeding your credit card limit, applying for more credit cards/loans will lower your score.
  • Bankruptcy or Consumer Proposal will significantly impact your score, and stay on your credit report for up to 7 years.

Your credit history is a great way for a lender to tell whether you’re a risky investment or not. Lenders look not only at your minimum credit score, but also at whether you have a significant amount of late payments on your credit report.

Your Mortgage Broker will run your credit bureau to see if there are any challenges you need to be aware of. Check out Solving the Puzzle – 5 factors used in determining your Credit Score  

3. Insufficient Income and Assets

With the high price of homes in the Vancouver & Toronto area, sometimes people simply don’t earn enough money to afford: mortgage payments, property taxes and strata fees along with their existing debt (credit cards, loans, lines of credit etc.).

You need to prove your previous 2 years’ income on your taxes with your Notice of Assessments (NOA). This is the summary form that the Federal Government sends back to you after you file your taxes, showing how much you filed for income and if you either owe money or received a refund. 

If you can’t provide documentation to prove your income, then you will likely get denied for a home mortgage loan.

Some home buyers will need to provide more money for a down payment (perhaps a gift from their family) or try to purchase a home with suite income. In some cases, home buyers will need to add someone else on title of the home, in order to add their income to the mortgage application. 

4. Down Payment is Too Small

A lender looks at the down payment as how much of an investment a buyer will be putting in their future home. Therefore, bigger is always better when it comes a down payment to satisfy your home mortgage loan application. Start saving now.

To qualify for a mortgage in Canada the minimum down payment is 5% for the purchase of an owner-occupied home & 20% for a rental property.

In Canada if you have less than 20% down payment, the federal government dictates that the home buyer must purchase CMHC Mortgage Default Insurance which is calculated as a percentage of the loan and is based on the size of your down payment. The more you borrow the higher percentage you will pay in insurance premiums. Check out Everything You Wanted to Know about Mortgage Default Insurance

For those with less than 20% down payment, the maximum amortization is 25 years, with more than 20% down payment 30-35 years (depending on the lender).  Check out 5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

5. Inadequate Employment History

Most lenders will want to see a consistent employment history of 2 years when applying for a mortgage, because they want to know you’re able to hold down a job long enough to pay back the money they’ve loaned you.

To prove your employment, you will need to prove a Job Letter with salary details.

If you’ve been denied a mortgage, chances are it was because of one of the above five reasons. Don’t be deterred, with a little patience and some work on your end, you can put yourself in a position to get approved the next time you apply.

The chart below lists the 10 main reasons people either don’t want or can’t get a mortgage.

list-of-reasons-for-not-buying-a-home-sept2016

Mortgages are complicated… BUT they don’t have to be!  Engage an expert.

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com