13 Oct

Mortgage Penalties – Ouch… How Much??

Mortgage Tips

Posted by: Kelly Hudson

Buying a home is both exciting and nerve wracking!  Everyone’s home purchasing situation is different, based on the 4 strategic priorities that every mortgage needs to balance:

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

The details in the mortgage contract can far outweigh the rate being offered.

When looking at a mortgage – Interest rates are very important, but even more important are the terms of the mortgage contract.

When I talk to mortgage clients – I explain the terms of the mortgage including the penalties associated with breaking a mortgage prior to the maturity date.

No one signs a 5-year mortgage contract expecting to need to break their mortgage.

Regrettably, life happens and 60% of homeowners, break their mortgage before it matures! 

The penalty for breaking a fixed rate mortgage is usually the greater of 3-months’ interest, or the Interest Rate Differential (IRD)whichever is higher!!!

In some cases, when your mortgage is very close to maturity, the 3-month interest penalty will be higher, but otherwise the Interest Rate Differential (IRD) penalty tends to be much higher than 3-months interest.

Variable rate mortgages usually use the 3-month interest penalty.

  • Some variable mortgages offering lower rates, however, will use an IRD or, in some instances, are closed (you cannot break them) without a bona fide sale of the property.
  • This is also the case for some niche fixed rate mortgage products.

With the Interest Rate Differential (IRD) penalty, there can be vast differences from one lender to another.

The IRD penalty is typically based on 4 things:

  1. The principal balance of the mortgage at the time you break it.
  2. The difference in the interest rate of the original mortgage and the rate the lender WOULD charge for the term closest to the remaining time on the mortgage
    • i.e. if there are 21 months left on your mortgage, the lender will most likely use their 2-year term interest rate as the comparison rate.
  3. The number of months remaining in the mortgage term.
  4. The discount off the posted rate the lender gave you
    • i.e. posted rate for 5 year fixed 5.29% when you got your mortgage
      • The rate you got from the lender was 5.29% less 3.0% Discount = 2.29%
      • The lender will use the discounted 3.0% when calculating the IRD

Penalties for breaking your mortgage.  Please check out 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  VIDEO Drawing Conclusions: How much does it cost to break a mortgage?

Check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

When mortgage shopping, you need to consider the interest rate, along with the terms of the mortgage including:

  • Confirm if there are prepayment privileges, or if it is a totally closed mortgage (except for a bona fide sale)
  • Pre-payment privileges (10%, 15%, or 20%)
    • Can you prepay throughout the year OR only on the anniversary date of your mortgage? Miss the anniversary date… too bad… so sad!
  • How your lender calculates their Interest Rate Differential (IRD) penalties when breaking a mortgage

More information about mortgage penalties

·        Bank charges $30,000 mortgage penalty to woman forced to sell home due to pandemic June 1, 2020

·        When it comes to mortgage break penalties, big banks are often the worst Globe & Mail Nov. 14, 2019

  • Variable – 3 months interest approximately 0.5-1% of outstanding balance
  • Fixed – Interest Rate Differential (IRD) – Banks/Credit Unions as much as 4-5% of outstanding balance based on their (inflated) posted rates

When you get a mortgage, no one thinks about breaking a mortgage and the penalties.  Being educated about all aspects of a mortgage, can make a huge difference to your bottom line.

Let’s have a chat and find 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

9 Sep

6 Tips for Success on Multiple Offer Home Purchases

Mortgage

Posted by: Kelly Hudson

The real estate market in Vancouver and Toronto is once again on a rampage!

There is low home inventory levels and historically low interest rates, making newly-listed homes sell quickly! Many homes are receiving multiple purchase offers, which is excellent news for sellers

not such good news for buyers.

As a home buyer, you need to be prepared!!

Buying a home is exciting, but having to compete for a home on which there are multiple offers increases a home buyers stress level. During multiple offer situations, the seller has no obligation to accept or negotiate any of the offers. Moreover, the seller has the liberty to choose the best offer to negotiate and they will accept the one that best reflects their needs.

While price it is important, it may not be the only factor sellers consider. Other factors they will look at include subject conditions and completion and possession dates.

Six tips for going into multiple offer situations 

1.   Work with a Mortgage Broker to Get Pre-Approved, versus Pre-Qualified

So you’ve gone into the bank and after a couple of questions they tell you are Pre-Approved… If you haven’t provided any documentation or run your credit – you’ve probably got a rate hold.

An important aspect of buying a home is knowing how much you can afford. Work with your Mortgage Broker to determine what you are comfortable paying on a monthly basis fits your budget. Make sure you know the highest amount you can offer. 

Pre-approved for a Mortgage Nov15There are major differences between pre-qualification and pre-approval   

  • First we must understand the concept of pre-qualification. When a bank takes a quick look at a buyer’s overall financial picture based on what the buyer tells them, they may look at the buyer’s credit bureau to make sure their credit scores are in line with the current mortgage guidelines.
  • A pre-approval is more involved. Here you will work with your Mortgage Broker to gather all the mortgage documentation up front, so everything is ready to go when it comes time to make an offer on a home.
  • Once you make an offer, time will be of the essence. You don’t want the added stress of collecting documents while negotiating and during the subject condition period.
  • Getting a pre-approval includes such things as: pulling your credit bureau, collecting tax returns (NOA’s), T-4’s, pay stubs, bank statements (to prove down payment), assets, liabilities, employment status, income, gifted down payments, any other properties you own, etc.
  • Pre-approvals are still subject to the lender approving the property (including strata docs for condo’s & townhouses) along with an appraisal being done on the subject property to determine current value. Appraisers are the bank’s eyes on the property you are buying, therefore lenders will only accept appraisers on their approved list. Appraisals can be a problem if you have reached your down payment limit and the price you paid for the property cannot be supported by the lender’s appraiser.

In a multiple-offer situation, having a Pre-Approval Certificate is extremely important and often helps the seller choose who they want to work with. 

2.   Engage an experienced Real Estate Agent 

Having the right Realtor can be critical to your interests. Your agent should be very experienced in working with Multiple Offers. Make sure they know and respect your spending limit.

  • Ask your Realtor to respectfully request if they could be notified if you are close in the bidding and would you have a chance to sweeten your offer? You never know until you ask.
  • Once you set your budget, stick to it! Determine exactly how much you can afford if you end up in a multiple offer scenario. A reputable agent won’t try to upsell you and/or encourage you to go above your budget. They will research comparable properties in the area and advise you. 

3.   Consider doing a home inspection ahead of time

Do everything possible to arrange for a pre-inspection of the property. It shows the seller that you are serious about purchasing. The seller may consider your offer more readily if it doesn’t include a “subject to inspection” clause. It is inadvisable to buy a property without a home inspection; it could cost you in many ways down the road. 

4.   Be very flexible 

Winning in a multiple offer situation is sometimes as easy as agreeing to certain seller conditions such as: closing dates, purchasing a property “as is” or even tightening the subject removal dates. 

Have your Realtor ask the seller’s Realtor for ideal closing dates. This may be important to the seller if they have already bought another property and want to move ASAP or if they want to remain in the home and rent back for a few months. Try to have as many of the seller’s preferences as possible satisfied when making your own offer. Being flexible and trying to make the transaction as easy as possible for the seller could win over a higher-dollar offer.   

5.   Write a letter 

You may wish to draft a personal letter (including a family picture) or even make a video for the sellers explaining how much you love their home and would like to raise your family there. It creates an emotional connection. Buying and selling a home is an emotional time for everyone, especially if the seller has lived there for a long time raising their own family. Sometimes, it’s not about the highest offer; some sellers might feel a strong connection to you and your family and decide they want to sell to someone who will really appreciate their home. 

6.   Know when it’s time to “Just Say No!” 

Multiple offer situations are stressful. You need to know what you can afford to spend and stick to your budget. Remember it’s your money and your life, so you get to make the final decision. 

Purchasing a home is not just about being smart, it is also about being comfortable regarding the decision you made. You need to find a home that will be a great place to create wonderful memories and start building equity. 

Any questions?  Give me a call!

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

18 Aug

Home Equity Line of Credit (HELOC) – Good or Bad??? Mostly it depends on your financial discipline …

Mortgage

Posted by: Kelly Hudson

More and more Canadians are using the equity in their homes as an ATM. The most common options are Lines of Credit (LOC) and Home Equity Line of Credit (HELOC)

Line of Credit 

A line of credit is an agreement by a financial institution (lender) to loan money to a borrower up to an agreed upon maximum. Interest is charged on the money that is withdrawn from the line of credit. i.e. if you have a Line of Credit for $10,000 and have borrowed $1,000 you only pay interest on the amount of money you have borrowed. 

Typical rates for a LOC are Prime plus 2-4%

The actual rate available to a borrower will vary depending upon several factors including:

  • general credit worthiness
  • security/collateral provided
  • borrowing/repayment history
  • employment
  • other products/services with that lender

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow.  A HELOC resembles a second mortgage but functions like a credit card.

A home equity line of credit (HELOC) is a form of loan that lets you borrow money against the equity in your home. Unlike a traditional mortgage, most HELOC’s are not constructed to fit a pre-determined amortization, although regular, interest payments are required by most lenders.

HELOC borrowers should recognize that, over time, these products can also significantly add to consumer debt loads, since the revolving nature of HELOCs can also lead to greater persistence of outstanding balances.

  • Financially disciplined borrowers elect to repay their outstanding HELOC balances over a shorter period relative to the average amortization of a typical traditional mortgage.

A HELOC can be a worthwhile investment when you use it to improve the value of your home. However, when you use it to pay for things that are otherwise not affordable with your income or savings, it can cause problems for people who lack financial discipline, become a bad debt.

Typical HELOC rates are Prime + .50-1% (depending on your agreement, your lender may be able to change the rate at anytime)

People choose HELOCs primarily for three reasons:

  1. They want a cheap source of readily available cash, should they need if for renovations, investing, education, emergencies, or personal use.
  2. They want an interest-only payment (the lowest payment you can get since you don’t have to pay off any principle).
  3. They want a mortgage with no penalty if they make big prepayments i.e. sell their home or change lenders.

Calculating a Home Equity Line of Credit (HELOC)

As per the Office of the Superintendent of Financial Institutions (OSFI), a HELOC can give you access to a maximum of 65% of the value of your home.

  • If you have a mortgage, your mortgage loan balance + your HELOC cannot equal more than 80% of your home’s value. (i.e. 65% HELOC + 15% mortgage = 80%)

HELOCs have a few disadvantages:

  • Your interest costs can soar when interest rates increase.
  • The revolving nature of a HELOC makes it very easy to get into debt and stay in debt if you are not financially self-controlled.
  • Making just interest-only payments can keep you indebted for many years beyond a traditional mortgage, since you do not have to make payments on the principle of the loan.

More information regarding HELOC’s:

  • 22% of borrowers get HELOC’s (source: CAAMP).
  • In 2014 the average HELOC was approved for $135,000 (source: CAAMP).
  • 9% of HELOC borrowers max them out
    • that includes people who use them as mortgage substitutes (source: CAAMP).
  • Most HELOC’s are collateral charges, which means you usually must pay legal or appraisal fees to change lenders.
  • HELOC’s can have two types of payments, depending on the lender:
    • Floating payments: This is where your payments increase, and decrease based on a benchmark of some sort (most commonly prime rate).
    • Fixed payments: This is where the lender keeps your payment the same for the entire term. If prime rate goes up, you pay more interest and less principal, and vice versa. In most cases, your payment must at least cover the interest due—or the lender will raise the payment.

The biggest challenge with using a HELOC instead of a mortgage, is that most people pay the interest only. By paying interest only, you have the lowest payment, BUT then “life happens” and you do not put any money on the principle to lower your debt.

With a traditional mortgage you pay both principle and interest, so every payment you make lowers your principle, and ultimately you pay off your mortgage.

HELOC’s are inherently riskier products, given their revolving nature and persistence of debt balances.

Using a home equity line of credit HELOC to buy your home.

While home equity lines of credit can provide people with low interest rates and flexible lending terms, “there’s more to this arrangement than meets the eye,”

Buying a house with a home equity line of credit has benefits that a mortgage doesn’t offer.

  • No prepayment penalty: The payment schedule on a line of credit is more flexible, so you can pay your mortgage off without incurring penalty fees. With a traditional mortgage, you may incur fees when you pay more than a certain percentage of the loan amount.
  • Readvancable: when you pay down the HELOC you can borrow the money again and again.

There are approximately 3 million HELOC accounts in Canada with an average outstanding balance of $70,000

Can you pass the HELOC knowledge test?

Despite Canadians’ confidence in their knowledge about how their secured line of credit works, the majority seemed fuzzy on the details.  When you use your home as collateral, the bank has legal rights to your property, and you cannot close on a sale of that home without paying back that loan.

For example, of those who said they did have a home equity line of credit:

  • 57% did not know that when you take out a HELOC the financial institution lending the money puts a mortgage on the borrower’s home.
  • 58% did not know that taking out a HELOC when they already have a mortgage on their home means that the lending institution places a second mortgage on the home, OR modifies the original mortgage to capture all the equity in the home;
  • 69% did not know that having a HELOC could negatively affect their credit rating or future loan applications.
  • 83% of survey respondents did not know that when they pay off and close their home equity line of credit, any credit card consolidated under this line of credit may be cancelled and not available for future use.
  • 62% did not know that having a home equity line of credit could negatively impact their ability to take out a loan or mortgage with another financial institution.
  • 58% did not know that when they take out a line of credit, their home becomes the bank’s security for any credit card debt, other loans they have with that bank, or any other loans they have co-signed.

HELOC’s for some can be a dangerous trap because they tend to spur people to spend more, which leaves them with more combined debt than someone without a HELOC.

Without understanding all the implications of this type of borrowing, consumers could risk their future credit or run into issues when they sell or refinance their home.

Here are a couple articles that may answer some of additional questions (or create some new questions!!) regarding HELOC’s.

·        Borrowing against home equity

·        Home Equity Loans: What You Need to Know

Let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Broker
Canadian Mortgage Experts
604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

22 Jul

Can You Port Your Mortgage??? Maybe… Maybe Not!

Mortgage

Posted by: Kelly Hudson

What is Porting a Mortgage? 

Porting is when you move your mortgage from your current property to a new property.

People do it when they buy a new home, want to preserve their current interest rate, OR avoid a penalty for breaking the mortgage early.  BLOG Mortgage Penalties – Ouch… How Much??

What many people don’t realize is that if you decide to port your mortgage, it is like starting from the square 1 on your mortgage. It requires a complete re-qualification for everyone on the mortgage, meaning a whole new application, all new employment documentation, a fresh credit check and a new appraisal.

Your mortgage is portable, right?

Most lenders claim their mortgages are portable, however porting is so complex these days that it has become one of the more over-rated mortgage features.

Let me explain:

  1. You don’t have enough income to qualify for the mortgage
    • If you don’t have enough provable income (i.e. your income has fallen since you last got approved), you could have a problem.
    • If you become self-employed after your mortgage funds, but don’t have the required two years of tax returns showing sufficient earnings. BLOG Self Employed??  Here’s What You Need to Know About Mortgages
  2. Your debt ratios are too high (you’re spending too much of your income on mortgage & debts)
    • If your monthly debt load and housing obligations have grown too large (more of your gross monthly income is needed to finance your home & debts), you’ll be declined.
      • In January 2018 the federal government implemented a Stress Test. Whichever is the highest is how you must qualify for a mortgage.
      • Qualify at the Chartered Bank Benchmark Rate (Government Rate) which fluctuates (currently 4.94%).
      • OR the contract rate your lender gives you PLUS 2% i.e. 2.99% + 2% = 4.99%
        • Since 4.99% is the highest – that would be the stress tested rate.
    • 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%.
  3. The new home purchase date doesn’t match up with the selling of your current home
    • If the purchase of your new home closes after the lender’s porting deadline.
      • Typically, Lenders allow 30-90 days to port your mortgage from Property A to Property B (a few allow up to 365 days).
      • It can be difficult to get the closing dates of your current and new home to fall within porting deadline.
  4. Your new property doesn’t qualify
    • Lender may LOVE you, but they need to LOVE the new property as well.
    • Many lenders have changed criteria on investment, leasehold, age-restricted, remediated grow-op properties, building flaws, co-ops, etc.
  5. Your credit score has fallen
    • The lender will look at your current credit score.  If you no longer meet the lender’s minimum credit score (typically 680+), porting your mortgage may not be an option.
      • OR if the lender allows you to port, you will pay a higher interest rate.
  6. You need more money
    • If you are upgrading your home, you will probably need a bigger mortgage.
    • Some lenders will only port the exact same dollar amount.
      • That means you may have to come up with the difference if you buy a more expensive home, or break your current mortgage.
    • Please note that for lenders that allow a bigger mortgage, applying for more money while porting (a.k.a., a “port and increase”) could reduce your negotiating power because the existing lender knows you don’t want to pay a penalty to leave.
      • Your current lender does not have to be competitive, since you are “stuck with them” so you don’t want to pay the penalty for breaking your mortgage.
  7. You’ve got a variable-rate mortgage
    • Your lender may not port its variable-rate mortgages (many don’t), you may have to break it and pay a penalty.
      • Some lenders will require you to convert your variable mortgage to a fixed rate before porting… typically you wouldn’t get the best rate.
      • If your mortgage has a home equity line of credit (HELOC) component, note that some lenders refuse to port HELOCs.
  8. You can’t get bridge financing
    • If your take possession of your new property before the sale completes on your old property, you need to “bridge” the down payment until you get the cash from your sale.
      • The problem is, not all lenders offer bridge financing. If yours doesn’t, and you need it, and you can’t get it elsewhere, you may have to break the mortgage.
  9. The property is outside the lending area
    • Some lenders have very restrictive lending areas.
      • i.e. If you’re with a credit union, you generally can’t port out of the province.
      • Many other smaller lenders have restrictions on rural properties, especially if the mortgage is not mortgage default insured.
  10. You want to keep your current maturity date
    • Some lenders require you to get a brand new 5-year term when you “port” your mortgage to a new property.
      • A 5-year term “could” lock you in longer than you’d prefer at a worse rate than you like.

Forewarned is forearmed. Understanding the pros & cons of mortgage portability can save you a lot of stress.

The bottom line:  Mortgages are portable (in theory).  However, in practice over 60% of people can not port their mortgage.

Any questions?  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 Jan

BC Property Assessment vs Home Appraisal

Mortgage

Posted by: Kelly Hudson

What is BC Assessment?

It’s January and people in BC have started receiving their property assessments.

BC Assessment is a provincial Crown corporation that values all real estate property in British Columbia. Every year, BC Assessment sends property owners a Property Assessment Notice telling them the fair market value of their property as of July 1 the prior year (July 1, 2019).

To see the most recent assessment for a property, click on the link BC Assessment and type in the address.

The real estate market is the single biggest influence on market values. Market forces vary from year to year and from property to property. The market value on an assessment notice may differ from that shown on a bank mortgage appraisal or a real estate appraisal because BC Assessment’s appraisal reflects the value as of July 1 of the previous year, while a private appraisal can be done at any time.

Use your BC Assessment as a starting point for the value of the property your planning your home purchase… Do not rely on BC assessment for the exact value of the property you’re considering purchasing.  Markets in BC can change quickly both increasing and decreasing in value depending on the area.

What is a Home Appraisal?

An appraisal is a document that gives an estimate of a property’s current fair market value.

Often there is no connection between BC Assessment and appraised value.  This is why lenders want an appraisal – an independent evaluation of the property’s value at this moment in time.

Primarily home appraisals are completed at the request of a lender.   Lenders want to know the value of a property in the current market before they are willing to lend against the home.

The appraisal is performed by an “appraiser” who is typically an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question, trained to render expert opinions concerning property values.

When an appraisal is done, consideration is given to the property, the home, its location, amenities, as well as its physical condition.

Appraisals may also be required when an owner has less than 20% down payment and needs mortgage default insurance.

Who pays for the Home Appraisal?

Typically, the borrower pays the cost of the appraisal, and upon completion, the appraisal goes directly to the lender (does not go into the home buyer’s hands).

I know it sounds odd, but brokerages, lenders and appraisers cannot just show the buyer the appraisal on a property, even though the borrower paid for it.

  • Think of an appraisal as an administrative fee for finding today’s current value of the property

You need a Home Appraisal since the lender doesn’t want to lend on a poor investment and the appraisal helps the buyer decide if the property is worth what they offered (especially in hot markets like Vancouver & Toronto).

  • What if you offered $475,000 and the home appraisal came in at $450,000?

 Why don’t you get a copy of the appraisal?  The appraiser considers their client to be to the lender (the reason the appraisal was ordered).  The lender has guidelines for the appraisal, and the appraiser prepares his report according to those parameters.

The lender is free to share the appraisal with the borrower, but the appraiser cannot share it.  This is because the lender is the client… NOT the borrower!!  It doesn’t matter who pays for the appraisal.

Sometimes an appraisal can come in lower than the purchase price, causing angry calls to the Appraisal Institute of Canada (AIC), and the answer they give is: the Brokerage or Lender is the client of the appraiser, and as such has ownership of the report.

One of the main reasons the buyer pays for the appraisal, is that if the mortgage doesn’t go through, the lender does not want to be on the hook for paying for the appraisal and not getting the business.

Lenders are also aware that home buyers could take the appraisal and shop it around with other Lenders to try and get a better deal.

It is rare for Lenders to share the report. With most appraisal companies, the appraisal may be provided after the closing of the mortgage transaction and must have the lender’s approval.

After the funding of your mortgage, some mortgage brokers may offer to refund your appraisal fee.

While a lender does not have to release the entire appraisal, there are some pieces of information that remain the personal property of the buyer, and PIPEDA legislation guarantees them access to that. However, any information on the report that does not relate to the property itself (such as the neighboring properties or other data about the community) would come off the report before the lender provided it.

Some other reasons for getting an Appraisal:

  • to establish a reasonable price when selling real estate
  • to establish the replacement cost (insurance purposes).
  • to contest high property taxes.
  • to settle a divorce.
  • to settle an estate.
  • to use as a negotiation tool (in real estate transactions).
  • because a government agency requires it.
  • lawsuit

Getting your home ready for an Appraisal:

The appraiser report involves a report including pictures of the home and property with the appraiser’s value of the property, along with a short summary of how that information was derived.

BLOG Need an Appraisal – 7½ Tips for Success 

Most lenders have an approved appraiser list which requires appraisers to have the appropriate designation. Lenders tend to reject appraisals that are ordered directly by property owners.  Lenders want the appraisal to be ordered by the broker or the lender, primarily to avoid potential interference from the property owner.

Home Appraisal Costs

Appraisal costs do vary.  Most home appraisals start around $350 (plus tax) but they can go much higher depending on how expensive the home is, location, complexity of the appraisal and how easily the appraiser can access comparable data.

BC Assessment vs appraised value: lenders want an appraisal – a professional, independent evaluation of a homes value, at this point in time!

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

4 Oct

Mortgage Insurance 101

Mortgage

Posted by: Kelly Hudson

Mortgage insurance… sounds simple doesn’t it??

For a first-time home buyer, the types of insurance surrounding a mortgage can be confusing, so it’s important to know what insurance covers what.

There are 3 main types of insurance to know about when buying a home.

Mortgage Default Insurance – If you put less than 20% down on a home you are buying, Government rules are you must pay for Mortgage Default Insurance which covers the lender should you default on your mortgage payments.

There are three mortgage default insurers in Canada – Canadian Mortgage & Housing Corp. (CMHC), Genworth or Canada Guaranty) The purchase of this insurance solely benefits the bank/lender.

For more information check out Everything You Wanted to Know about Mortgage Default Insurance

Mortgage Insurance and/or Life Insurance

You’ve just made the biggest purchase of your life: a new home for you and your family.

  • What’s the best way to protect your investment if you die?

Insurance is the answer. But what kind: mortgage insurance or life insurance? 

There are important differences between the two that we’ll examine.

Mortgage Insurance Life Insurance
Tends to be quicker to process. Can take 30-90 days to put into place.
Can be easier to qualify for. With individual owned insurance the medical underwriting is completed up front, so you know what is covered when your policy is approved.
Decreasing benefit – the amount of coverage with mortgage insurance decreases as you pay down the balance each month, while the monthly insurance payments remain the same. If you get coverage for $500K, it stays at $500K until you decide to change it, or your term expires.

Beneficiary is the lender/bank who holds your mortgage. You can designate the beneficiary/beneficiaries.
Mortgage insurance is attached to the outstanding balance on your mortgage. Life insurance is attached to you rather that your debt.
Typically, your mortgage insurance policy pays off the current balance on your mortgage to your lender/bank. The beneficiary(ies) decide what to do with the insurance.  Funds can be used to pay off the mortgage or any other bills (funeral, hospital/home care expenses, living expenses, education etc.).  It’s your money, and you can decide how to use it.
You can cancel anytime i.e. you find an insurance product that suits you better. You can cancel anytime i.e. you find an insurance product that suits you better.
Portability – mortgage broker sold Mortgage Insurance policies are portable. Which means that if you switch lenders or buy a new property, you will be able to transfer your Mortgage Life Insurance to a new property. Make sure you ask your Insurance Provider if the insurance they are recommending is portable.·         Take note that when the bank offers you Mortgage Insurance you will not likely be able to transfer your Mortgage Life Insurance to a new lender or property thereby limiting your future financing options. Completely portable.  Doesn’t matter if you buy a different home or switch lenders/banks, life insurance follows you not your property.

Please note:  Mortgage/Life Insurance is not mandatory to qualify for a mortgage.

You have made the biggest purchase of your life… how do you protect yourself and your family?  Many people say they have life insurance through their work, but is it enough?

  • The question you should be asking is – do you currently have enough life insurance in place right now, equal to your mortgage amount?

Top Benefits of purchasing Mortgage/Life Insurance

  1. Peace of Mind – creates a sense of security that your loved ones will be taken care of if you pass on.
  2. Mortgage Can be Paid Off – whereby any other policies that are held will be able to assist with other needs.
  3. Family can Stay in their Home – if there is the unfortunate life event that is the death of the Mortgage/Life Insurance policy holder, the mortgage can be paid off which will allow the family to stay in their home and not become displaced, causing additional anguish.
  4. The Younger you are, the Less Expensive – Which means that insurance is extremely affordable for a young, and likely, first time home buyer.
  5. Good Health = Coverage for Unexpected Illness Later on – After illness strikes, it is more difficult to acquire life insurance.

Mortgage/Life Insurance is an option that anyone with a mortgage should consider. Ask me about a referral for reputable and credible insurance.

While we’re discussing insurance, there are other types of insurance you need to consider as well…

  • Fire insurance – most lenders will want to see that you have fire insurance in place, prior to funding your mortgage to “protect” their investment.

Additional insurance options:

  • Disability insurance
  • Personal content insurance

Mortgages are complicated… BUT they don’t have to be!  You need to protect your investment by engaging 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

26 Jun

Don’t Forget the Closing Costs When You Purchase a Home

Mortgage Tips

Posted by: Kelly Hudson

The purchase price you negotiate when buying or selling a home is just one part of the total cost for buying a home. In addition to the purchase price there are several other fees – known as closing costs – all of which you need to factor in to your purchase price.

Closing costs tend to be hidden costs when buying a home. It’s not a set number, but a compilation of various administrative, legal fees and other one-time expenses associated with the purchase of a home that are due on the completion date.

These costs can add up, so you’ll need to factor these costs into your cash-on-hand budget.

Many first-time home buyers under estimate the amount of cash they will need for closing costs. Typically, you’ll want to budget between 1.5% and 4% of the purchase price of a resale home to cover closing costs.

Of course, these are estimates — the actual amount you will need could be higher or lower, depending on factors like where you live, the type of home you’re buying, or if it’s a new construction (+5% GST).

To help you plan the purchase of your property, here’s a snapshot of the extra fees you can expect to pay once you’ve settled on the price of your home.

  • Legal Fees
  • Title Insurance
  • Fire Insurance
  • Adjustments
  • Property Transfer Tax (PTT)
  • GST
  • and more…

Here’s an overview of what you can expect.

Legal Fees:

Legal/Notarial Fees and Disbursements. The lawyer/notary is the person who goes through all the paperwork and makes sure that everything is legitimate and binding. They confirm that all the items that were agreed to by the buyer, seller/builder, and lender are written and worded correctly. Your legal representative should also be able to walk you through each document that you sign so that you understand what you’re agreeing to. Legal fees range from $500 to $2,500. You will also need to reimburse them for their out-of-pocket costs that they incurred while handling the various searches and registrations, including title insurance (see below), property and execution searches, and the registration of the mortgage and deed. These disbursements are repaid to the lawyer on the closing date, as well as incidentals such as couriers, certified cheques, and photocopying, the land transfer tax, the down payment, and any interest adjustments.

Title Insurance:

Title refers to the legal ownership of the property. The deed is the physical legal document that transfers the title from one person(s) to another. Both the title and deed of the home must be registered with a land registrar.

Most lenders require title insurance as a condition of granting you a mortgage. Your lawyer or notary helps you purchase this.

Title insurance protects you from title fraud, identity theft and forgery, municipal work orders, zoning violations and other property defects. It can also protect you against fees and costs that were not caught in the searches your lawyer conducted prior to the sale (Yes this can happen!).

Title insurance premiums range from $150-$500 depending on the value of the property.

Fire/Home Insurance:

Mortgage lenders require that you have fire/home insurance in place by the time you complete the purchase of your home.

Property insurance protects you in case of fire, windstorms or other disasters. It covers your home’s replacement value. The amount required is at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. Home insurance can vary anywhere from $400 per year for condos to $2,000 for large homes.

Adjustments:

An adjustment is a cost to you to pay the seller for the seller prepaying for something related to the house including property taxes, condo fees, heat etc. on your behalf.

Simply put, if you take possession in the middle of a month, the seller has already paid for the whole month and you must pay the seller back for what they’re not using. These adjustments are prorated based on the date you complete your purchase of the home. The most common adjustments are for property taxes, utility bills & condo fees that have been prepaid.

Property transfer tax (PTT) in British Columbia:

Is a tax charged to you by the province. First-time home buyers are exempt from this fee if they are purchasing a property under $500,000. All home buyers are exempt if they are purchasing a new property under $750,000.

GST:

Is a federal value added tax 5% on the purchase price of a new home. If someone has lived in the home, the home isn’t subject to GST.

  • There is a partial GST rebate on new properties under $450,000.

Interest Adjustment Costs:

Most lenders expect the first mortgage payment one month after completing the purchase of a home. If you close mid-month, please note some lenders expect the first payment, or at least the interest accrued during that time, on the 1st day of the next month. When arranging your mortgage, ask how interest is collected to the interest adjustment date.

Other closing costs:

Will your new home need furniture? Carpets? Lighting? Window coverings? Appliances? Do you have the equipment you need to maintain the lawn and gardens? Are you hiring movers or renting a truck? Will you need boxes, bubble wrap and tape for the move?

While these and other out-of-pocket costs aren’t part of the real estate transaction, you still need to budget for them. Plan your expenses as much as possible. If necessary, decide what you can put off buying until later, after you move in and get settled.

Congratulations!! You’re all caught up on your closing day costs. Now its time to get your keys and enjoy your new home.

Mortgages are confusing… 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 Oct

Self-Employed?? Here’s What You Need to Know About Mortgages

Mortgage Tips

Posted by: Kelly Hudson

Why, why, why it is so challenging for entrepreneurs to obtain a mortgage in Canada?

If you’re among the 2.7 million Canadians who are self-employed, regrettably your income is not as easy to document as someone who’s traditionally employed.

Since 2008, mortgage regulations in Canada have made it more challenging for those who work for themselves to qualify for a mortgage due to tighter restrictions on “stated income” loans.  In 2012, Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced Guideline B-20, which requires federally regulated banks to evaluate applications for residential mortgages and home equity lines of credit with more scrutiny.

These rulings made it more challenging for the self-employed to prove income.

Here’s what Self-Employed home buyers need to know:

  1. Most self-employed are motivated to decrease their earnings to avoid paying tax through legitimate expenses and personal deductions.
    • Therefore, much of one’s self-employed income does not show up on paper.
  2. I’m sorry… but you can’t you can’t have your cake and eat it too! If you choose to write off as much of your income as legally possible to avoid paying taxes, claiming low take-home pay, you will end up paying a higher interest rate on your mortgage.
    • i.e. home buyer is a tradesperson, they earn $70,000/year and legitimately write off their business expenses to $40,000/year on Line 150 of their tax return. Lenders use income from Line 150… not gross income to determine affordability.
    • Some lenders allow you to “gross up” your declared taxable income (as opposed to stated income) by adding up to 15%.
      • i.e. if your declared income on your Notice of Assessment (NOA) is $40,000, the lender could add 15% for a total of $46,000. In most cases this doesn’t really help the business owner, as their income is still too low to qualify for the mortgage they want.
  3. The new mortgage rules mean the assessment of a self-employed applicant’s income has become far more rigorous. Lenders now analyze the average income for the industry a self-employed candidate works in, and study the person’s employment history and earnings in the field. Their stated income should be reasonable, based on:
    • industry sector
    • type of business
    • length of time the operation has been in business
  4. Work with professionals. You need to hire a qualified book keeper and a Chartered Professional Accountant (CPA). Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
    • You need to keep all your financial affairs up to date. That means getting the accountant prepared financials, filing your annual tax returns and most importantly paying your taxes. Government always gets first dibs on any money.  Lenders won’t be interested in you if you haven’t paid your taxes.
    • I recommend having a discussion with your CPA. Let them know that you want to buy a home.  Come up with a budget of what income you need to be able to prove on your tax returns.
      • Suggestion: you could choose to pay more personal income tax this year, to push your line 150 income up and help you qualify for any mortgage transactions you hope to make.
      • Please note: most lenders will want to see 2 years history, to prove consistency in earnings.
  5. For self-employed borrowers, being able to document income for the past 2-3 years gives you more lending options. Some of the documents your lender may request include:
    • Credit bureau (within 30 days of purchase)
    • Personal tax Notice of Assessment (NOA) for the previous two to three years.
    • Proof that you have paid HST and/or GST in full.
    • Financial statements for your business prepared by a Chartered Professional Accountant (CPA).
    • Contracts showing your expected revenue for the coming years (if applicable).
    • Copies of your Article of Incorporation (if applicable).
    • Proof that you are a principal owner in the business.
    • Business or GST license or Article of Incorporation

6. If you have less than 20% down payment, Genworth is the only option of the 3 mortgage default insurers that still has a stated income program.

Self-employed home buyers, who can document proof of income, can generally access the same mortgage products and rates as traditional borrowers. 

Tips for self-employed applying for a mortgage to ensure the process goes smoothly:

  1. Get your finances in order. Pay down your debt!!
    • Every $400/month in loan payments lowers your mortgage eligibility by $100,000
    • Every $12,000 in credit card debt lowers your mortgage eligibility by $100,000
    • Do you see a theme here??  Pay down your debt!  Resist buying/leasing a new vehicle or taking on any additional debt prior to buying your home
  1. 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada 
  1. Have two to three years’ worth of your self-employed supporting documentation available so your mortgage broker can work with you to set up your Mortgage Preapproval.
  1. Be consistent and show stability. Lenders prefer self-employed borrowers who work in a business that’s established and have expertise in that field.

What happens if the banks still don’t want you for a conventional mortgage??  

Many high net worth business owners with low stated incomes turn to private mortgage lenders for financing, since they can’t prove their income.

It is difficult to navigate which lenders specialize in self-employed mortgages.  Using a mortgage broker has obvious advantages, since mortgage brokers have access to multiple lenders and have a broad knowledge of the mortgage market.

Being self-employed need not be a deterrent to buying a property.  Let’s have a chat so I can connect you to the lender most suited to your situation.

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