Know Your 5 C’s of Mortgage Lending

Mortgage Tips Kris Krawiec 24 Sep

We all know the real estate industry is hot right now and for many getting into the housing market, it can be a pipe dream. With tightening government and lending regulations, historically low interest rates and soaring housing prices, it can be a daunting endeavour for anyone.

Whether you are a first time home buyer, wanting to upsize to accommodate your growing family or purchasing an investment property, these are the factors that lenders will be looking at. This will determine which mortgage type and interest rate will be available to you.

Know Your 5 C’s:

Collateral – The property itself that you are hoping to purchase.

Capital – Where is your down payment coming from? At a minimum, you need 5% down for a “high ratio” insured mortgage or a “conventional” mortgage with 20% down. This money can come from your own resources or can be gifted from a family member. Requirements will vary, so make sure to check with your mortgage professional.

Credit – Do you have proven credit and show a good history of repayment?

Capacity – The most important by far! How are you going to pay for your mortgage? Proof of income and requirements differ depending on whether you are salaried, self- employed, paid hourly or somewhere in between!

Character – Are you a super person? This is the least important factor to lenders these days.

Just as important to consider, when deciding on your mortgage, is to determine your current financial situation and longer term goals. This will help you decide which mortgage term and amortization (for example a 5 year term with a 25 year amortization) and mortgage rate (variable or fixed) is best for you. Finally, don’t forget to discuss the FEATURES that come with your mortgage as this could save you thousands of dollars and potential grief over the term of the mortgage. These features can include pre-payment options, lower early payout penalties and portability, providing you with flexibility and options for paying down your mortgage faster or making changes, should the need arise.

Mortgages are NOT a one size fits all, so always make sure to contact and discuss your options with a licensed mortgage professional BEFORE preparing to find the home of your dreams.

Qualifying Purchase Price – Why I’m Now Giving My Clients Two Price Points

General Kris Krawiec 10 Sep

Back in June 2012 OSFI (Office of the Superintendent of Financial Institutions) rolled out their B-20 Residential Mortgage Underwriting Practices and Procedures, in an effort to force banks and lenders to follow more prudent underwriting guidelines.

One of the most impactful changes was imposed on borrowers who want to take a Variable rate, or a term of less than 5 years. Prior to the B-20, we were able to qualify clients for these types of products using a 3-year discounted rate. To put that in perspective, current 5-year rates are between 2.99% and 3.09%, whereas 3-year discounted rates are between 2.49% and 2.79%. Now, the B-20 mandates the following:

If a client is taking a 5-year fixed rate product, we are able to qualify them using the contractual rate (ie, the discounted rate that their mortgage will be based on) and, as mentioned above, those discounted 5-year rates are currently available between 2.49% and 2.99%.

However, if a client wants a Variable rate, or a term less than 5 years in length, we are forced to qualify them using the Bank of Canada’s posted rate, which is currently 4.64%. What this does is increases the qualifying payment, and since approvals are essentially based on an income-to-debt ratio, said clients will essentially qualify for a lesser purchase price if they want one of these products.

Now, just to curb any confusion, the qualifying rate is not the rate these clients are actually paying. The contractual rate for Variable rates is currently between 2.40% and 2.50% and 2, 3, and 4 year fixed rates range between 2.49% and 2.99%. The purpose of using the Bank of Canada’s posted rate to qualify for these products is simply to prove that these particular clients could potentially handle their mortgage at a higher rate. In the event that rates eventually increase, OSFI feels more comfortable knowing that these clients will still be able to afford making their mortgage payments as they have qualified at a rate as high as 4.64%.

And thus the reason that when clients ask me what they qualify for, I am now having to give them two different price points. One price point that they qualify for on a 5-year fixed product, and a second, lower price point, that they qualify for if they want all of their product options available to them.

Verifying Your Down Payment – What You Need To Know

General Kris Krawiec 9 Sep

Saving for a down payment is often one of the biggest challenges facing young people looking to break into the real estate market.  The source of your down payment could come from your own savings, a gift from a family member, your RRSP if you’re a first time home buyer or from the proceeds of selling your current home.

No matter where your down payment comes from,one thing that is for certain is your lender will be verifying your down payment prior to full approval. It’s required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which can change your lending ratios and your ability to repay your mortgage.

DOCUMENTS YOU WILL NEED TO SHOW WHEN VERIFYING YOUR DOWN PAYMENT

1. Own Savings/Investments:  If you’ve saved enough money for your down payment, congratulations!  What your lender will want to see is a 3 month history of any source accounts used for your down-payment such as your savings account, TFSA (Tax Free Savings Account) or Investment account.

Your statement will need to clearly show your name and your account number.  Any large deposits outside of your normal contributions will need to be explained i.e.  you sold your car and deposited $12,000 or you received your bonus from work.  If you have transferred money from one account to another you will need to show a record of the money leaving one account and arriving in the other.  The lenders want to see a paper trail of where the money came from and how it got in your account.  This is mainly to combat money laundering and fraud.

2. Gifted Down Payment:  Especially in the pricey Metro Vancouver and Toronto real estate markets, the bank of Mom and Dad is becoming a more popular source of down payments for young home buyers.  You will need a signed gift letter from your family member that states the down-payment is indeed a gift and no repayment is required on the funds.

Be prepared to show the funds on deposit in your account no later than 15 days prior to closing.  Again, the lender wants to see a transaction record.  i.e. $25,000 from Mom’s account transferred to yours and a record of the $25,000 landing in your account.  Documents must show account number and name.

Gifted down payments are only acceptable from immediate family members (parents, grandparents, siblings). 

3. Using your RRSP:  If you’re a First Time Home Buyer, you may qualify to use up to $25,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.  To see if you qualify for the Home Buyer’s Plan to use your RRSP’s as a down payment visit here.  You will need to complete aForm T1036 to withdraw your funds without penalty.

Verifying your down payment from your RRSP is just like verifying from your savings/investment accounts.  You will need to show a 3 month history via your account statements with your name and account number on them.  Funds must have been in your account for 90 days.

4. Proceeds From Selling Your Existing Home:  If your down payment is coming from the proceeds of selling your current home then you will need to show your lender a fully executed purchase and sale agreement between you and the buyer of your home.  If  you have an outstanding mortgage on the property, be prepared to provide an up-to-date mortgage statement as well.

5. Money From Outside Of Canada:  Using funds from outside of Canada is acceptable but be prepared to have the money on deposit in a Canadian financial institution at least 30 days before your expected closing date.  Verifying your down payment from overseas will also require that you provide a 90 day history of your source account.

No matter what the source is, verifying your down payment will require you to show documentation of where the money originated from and be ready to explain any large deposits.  Making regular contributions into your savings or investment accounts will help develop a pattern of deposits and avoid any red flags.  Don’t stockpile your cash and make large lump-sum deposits.

Most lenders will want to see that you have 1.5% of the purchase price on deposit as well to cover your closing cost.  If you buy a home for $650,000 you will need a minimum of 5% down ($32,500) and another $9,750 (1.5%), for your closing cost.  You will need to show a total of $42,250 available on deposit.

Thanks for reading and if you need more information, please don’t hesitate to contact Kris Krawiec your Mortgage Broker at 416-845-3745 or kkrawiec@dominionlending.ca.

Have You Considered Purchasing a Mississauga Property with a Secondary Suite?

General Kris Krawiec 3 Sep

The Canadian Mortgage and Housing Corporation (CMHC) recently announcedthat in order to facilitate affordable housing choices for Canadians, it would be making some policy revisions on how they consider income derived from secondary suites. Considering the last 4 years have been nothing but tightening of rules, making it harder for Canadians to secure mortgage financing, this news is certainly welcome.

INSTEAD OF USING JUST 50% OF THE INCOME DERIVED FROM A SECONDARY SUITE, CMHC WILL NOW FACTOR IN 100% OF RENTS PAID, WITH SOME CONDITIONS OF COURSE! 

As of September 28th 2015:

  • CMHC will consider up to 100% of gross rental income from a 2-unit owner-occupied property that is the subject of a loan application submitted for insurance. The annual principal, interest, municipal tax and heat (P.I.T.H) for the property, including the secondary suite, must be used when calculating the debt service ratios.
  • For 3 – 4 unit owner-occupied and 1 – 4 unit non-owner occupied properties, the net rental income (gross rents less operating expenses) can form part of the borrowers’ gross annual income.

Additional conditions when 100% of gross rental income is used include:

  • The income must have been sustained over at least two years.
  • The income amount must not exceed the average of the past two years, to address income fluctuations, smooth out cyclical trends and unexpected events such as vacancies.
  • Up to 100% of gross rental income may be used only where prospective borrowers can demonstrate a strong history of managing credit, generally considered to be a minimum credit score of 680.

SO WHAT DOES THIS MEAN FOR YOU?

If you have been on the fence about getting into the housing market, this recent announcement highlights an option you may have not already considered. What about buying a property with a legal secondary suite to use the income to help pay your mortgage? CMHC has just made it a little more affordable to qualify for buying properties like this – certainly worth a look!

If you would like to discuss how much mortgage you qualify for and look at different scenarios of qualifying with a secondary suite rental income, I would love to have an in depth look at your finances and provide you with mortgage options! Let’s talk!

HOW TO PREPARE TO BUY A HOME WHILE YOU ARE GOING TO SCHOOL

General Kris Krawiec 3 Sep

Many people find themselves renting a home and helping others get ahead financially. When the question of “why rent” is posed, the most common answer is the issue of not having a down payment. What is interesting is that the person could afford the monthly payments but simply does not have the down payment. Home ownership in North America is less than 70%. The US Census Bureau reports that the US homeownership rate fell to 63.4% in the second quarter. This is the lowest level since 1967. In comparison, home sales are doing very well in the USA. Home construction companies are doing a booming business. Cabinet maker American Woodmark (AMWD) stock price started the year at about $29 and has hit a high of $67 a share. US private equity firm The Blackstone Group (BX) is now the single largest homeowner in America. They rent homes to those who cannot buy. Put yourself in the position to buy.

How does one go about obtaining the down payment? First let’s look at the options once you get that down payment. You could buy a condo or a townhome and have a reasonable payment. A home might seem to be out of your price range but if you purchase a $600,000 home with a rental suite with 5% down your mortgage payments would be about $2,700 a month. Take this amount then consider the $1,100 you get for renting your basement suite and your portion of the mortgage is $1,600 a month. This makes it much more affordable. Then there is also the option of renting out rooms and sharing living space for a season for additional income.

The biggest reason one does not have the down payment is lack of planning and perhaps the lack of hope for ownership of a home. Let’s take the case of a teenager. They have a vision of owning a home by the time they are 23 years old, after they have completed their degree. Let’s call them Homeowner. Another teenager has a vision of driving a nice car. We will call them Car-owner. Homeowner works hard while getting their education. There is not a lot of time between work and school. They stay at home rent free while going to school but have to pay for their schooling. They invest what is left and over the next six years watch their investments grow.

Car-owner buys a nice car; interest on the car loan is only 1.9% so almost free money. Car payments are $500 a month, insurance is $200 a month and car owner decides he wants to live independently as a renter as it is only $500 a month. While going to school Car-owner decides to get student loan so he does not have to work as much. Car-owner finds he is spending $2,000 a month on living expenses.

At age 23 they both are out of school. Homeowner looks at their savings and sees it has grown to $120,000. With this as a down payment, they can purchase a home and rent out a portion to begin their journey as a Homeowner.

Car owner gets a good job after graduating from university. Student debt is at $50,000 and the car is getting old so it is sold and upgraded to another car with another loan. Then there is the question, “How am I supposed to get a down payment?”

This is very possible and the reason why it is imperative to start taking financial small steps one day at a time. Compound savings and consistent budgeting will prove to be very fruitful in just a few short years. I have personally seen young people taking the steps to save and invest while going to university and compiling a portfolio of investments that would give them a substantial down payment. This does require sacrifice. It is a wise soul who weighs the cost in their youth and moves toward establishing a healthy financial future. I look forward to seeing more of these young people moving towards purchasing their homes and establishing themselves early in their careers.