A Mortgage Pre-Approval – A Smart First Step When Looking for a Home

Even with interest rates touching historic lows, getting a pre-approval for mortgage financing before you start to look for a home is a smart move.

A pre-approval also assures you of a locked-in mortgage rate for a set period – so there is no risk of any interest rate increases while you are house hunting.  The great news for those who turn to a mortgage broker is that a broker may be able to obtain a longer pre-approval rate hold.  Also, with a pre-approval, you’ll get a clear-cut sense of how much you are eligible to borrow.

Keep in mind that the property you intend to purchase – along with your supporting information (such as income, down payment and employment history) – has to meet the financial institution’s criteria to be approved for lending.  Also, a pre-approval is not a guarantee of financing, and does not eliminate the need to make a conditional offer.

Getting a “full” pre-approval takes away much of the stress of your home purchase.  This is where the mortgage broker reviews in detail your mortgage application and supporting documentation.

Often, a bank or broker will just take your information without reviewing  your supporting documentation (e.g., job letter, pay stubs, down payment confirmation etc.).   This leaves the possibility of hitches should the documentation not match what was originally declared in the application.  While this make require an investment of time on your part and on the broker’s part, it is a smart thing to do so that your transaction flows smoothly.

Tips for Boosting AffordabilityTips for Boosting Affordability

Lower mortgage rates have meant increased affordability for home buyers.  For first-time buyers looking for a home of their own, there are some ways to further increase mortgage affordability and stretch one’s housing dollar.  Here are some tips to consider:

Know what you can afford. A mortgage pre-approval helps you establish a price range and the maximum mortgage you can reasonably afford.  Many lenders will lock-in a rate for up to 120 days when pre-approving potential borrowers for a mortgage.

Revisit your current debts.  When applying for a mortgage, a lender will look at your total debt service ratio (TDS), or how much of your total income is going towards various types of debts, including car loans, credit cards, and other consumer loans.  A mortgage broker can advise on restructuring your current debt (by increasing the amortization and lowering payments on your car loan, for example), to ensure that your TDS ratio is acceptable to prospective lenders.

Increase the size of your down payment.  Increasing the size of your down payment means a lower monthly payment.  A common way for first time buyers to come up with more cash for a down payment is to make use of the federal Home Buyers’ Plan.  With this Plan, you can now withdraw up to $25,000 each from a registered retirement savings plan (RRSP) without tax penalty to buy or build a qualifying home.  Also, many lenders allow the down payment to come from a properly documented gift, and a borrowed down payment may be possible for some borrowers.

Understanding Your Home Purchase Closing Costs

Many homebuyers are startled to learn that after they arrange their mortgage they have to pay a range of additional fees to finalize the deal.  It pays to be informed, and we can advise you on these closing costs and on how you might be able to lower them.
What Are Your Closing Costs?
Your exact closing costs will depend on where you live, how much you are borrowing, how you finance your mortgage and your closing date.  Here are some of the most common costs:

1. Lawyer’s Fees – These vary across BC, and we can refer you to a lawyer who can assist you with your transaction
2. Mortgage Appraisal Fees – Lenders require an evaluation of the mortgage lending value of a property.
3. Land Survey – The legal written and/or mapped description of the location and dimensions of your land, obtained from an accredited land surveyor.
4. Title Insurance – May be purchased in lieu of a land survey in some cases.  Provides protection against several defects such as problems with the property that would have been revealed by an up-to-date land survey.
5. BC Land Transfer Tax – Buyers must pay this tax to the the provincial government when the property’s title passes from the seller.  The tax is equivalent to 1% of the first $200,000 and 2% of the amount above that.  First time home buyers can be exempt from this tax.
6. High Ratio Mortgage Insurance – Needed if you are buying a home for less than 20% down. This is a cost of obtaining a low downpayment mortgage and strictly a closing fee.  Most borrowers add this fee to the mortgage.
7. Home Inspection Fee – an objective visual examination of the physical structure and systems of a house, which most buyers opt for.

When you come in for a consultation, we will discuss what you need to prepare for in terms of closing costs so you are well prepared for the closing of your transaction.

Looking for a down payment on a home? Check your RRSPs

If you’re a first-time homebuyer, with the federal Home Buyer’s Plan you may be eligible to withdraw funds from your registered retirement savings plan (RRSP) for a down payment when buying or building a qualifying home.  Under the program you can now withdraw up to $25,000 without tax penalties, according to measures announced recently in the 2009 Federal Budget.   Couples can withdraw up to $50,000 from their RRSPs.

Here is a basic overview of some of the rules:

• You must be considered a first time homebuyer, i.e. you cannot have owned an owner occupied home in the previous five years.
• You must be a Canadian resident.
• The property purchased must be for a principal residence.
• The RRSP must be repaid within 15 years, with minimum annual payments of 1/15th of the withdrawn amount.
• Funds must have remained in your RRSPs for a minimum of 90 days before they can be withdrawn under the Home Buyers Plan.
• You will have to complete Form T1036, “Home Buyers Plan (HBP) – Request to Withdraw Funds from an RRSP” available at the Canada Revenue Agency website www.cra-arc.gc.ca in the RRSP section.

How to Get Approved for the Highest Mortgage Amount

With the credit crunch, many lenders have tightened up their lending guidelines.  Many borrowers are finding out that they no longer qualify for the same amount they did last year even with lower interest rates.  Here are a few tips on increasing the amount you get pre-qualified to purchase:

1. Choose the right lender – there are conservative lenders and there are aggressive lenders.  All lenders have consistent standard debt service ratio policies – That is, you are allowed to spend up to a certain percentage of your gross income on mortgage payments.  Some lenders allow you to spend only 32% of your gross income on housing payments while others allow you to spend up to 44% of your gross income.  This can result in a significant difference.  For example, a couple with a combined income of $60,000 and no debt can qualify for $265,000 with one lender and $390,000 at another lender.
2. Ensure your credit is in great shape – Your lending limits will depend on your credit.  With a credit score of 680, some lenders will allow you spend up to 44% of your gross income on housing payments.
3. Pay off all other debts (or reduce payments payments) – Every dollar you are required to pay towards other debts (e.g., car loans, credit cards payment, personal loans) reduces the amount you can use towards your mortgage.
4. Find a property with a mortgage helper – Rental income from a basement suite can significantly boost the amount of money you qualify for.  This will also depend on how your lender treats income from rental properties.
5. Use a mortgage broker – You can spend your time going from one lender to another checking your qualification limits or you could go to a person who can tell who which lender will be inclined to provide you with the right product for you.  The only one that can do this is a professional mortgage broker – Your bank cannot offer the wide variety of products and options that  a mortgage broker can provide.

2009 Budget has measures to stimulate the housing industry

If you haven’t heard yet, the new budget released on January 2009 has some goodies for first time home buyers and the housing industry.

• First time home buyers can claim a 15% non-refundable tax credit up to $5,000, for a maximum of $750.   This is to help defray the cost of the closing costs and transfer taxes in a home purchase.  If a home is purchased jointly, the total credit that may be claimed by all purchasers is $750. The unused portion of the credit can be transferred to a spouse or common-law partner
• The maximum you can now withdraw from your RRSPs under the Home Buyer’s Plan has been increased from $20,000 to $25,000.  Couples can withdraw up to $50,000 without paying taxes.
• The budget offers a temporary home renovation credit for projects paid between January 27, 2009 and February 1, 2010.  Homeowners can claim at 15% credit against renovations with a minimum cost of $1,000 and a maximum cost of $10,000.

Prices Drop for Pre-sale Condos

With home values coming down, pre-sale condo buyers should move forward as soon as possible on securing their mortgage.

I’m currently working on a file where in the buyer purchase a pre-sale condo in the Coquitlam area.  The couple purchased the condo in September 2006 for $445,000 plus GST.  The building is almost complete and the move in date has been set for February 2009.  The client approached me to secure a mortgage.  The big surprise was that the current appraisal came in more than $100,000 lower than the purchase price.  Based on my discussions with the appraiser, this is becoming a very common scenario.

This is a problem for lenders since the value they use for the property is the lower of the purchase price and the appraised value.  If the appraised value is lower the purchase price, the borrower will need to come up with a higher down payment.  Thankfully, for my client, this wasn’t a problem since they could come up with a higher downpayment.

If you are in a situation with a pre-sale condo, you should look into whether the value has dropped in your area.  It can only a few sales by financially strapped condo owners to bring down the market value of the properties in your area.  With lower values, you will need to discuss with your mortgage broker the appropriate measures you need to take so you can move into your new home.

Gas Prices and its Impact on the Real Estate Market

GM and Chrystler recently announced that they are leaving the auto leasing market due to heavy losses in this sector.  Apparently, when their trucks (and also cars) are returned to the dealership, the vehicles cannot be sold for the residual value as people trade down to a more fuel efficient vehicle.  This is a sure sign that the impact of high gas prices are being felt by the auto sector.

There is no doubt that this trend will also affect the real estate sector.  Home purchasers would be wise to heed this warning.

Here at BCMortgage.ca, we believe a home is not just a place to live and raise a family, it is also a very significant long-term investment.  The effects of high gas prices will influence where people purchase property and consequently, where demand for real estate will head.  This sentiment is echoed by Cameron Miur, chief economist for the BC Real Estate Association.  Mr. Muir says that while it may take a while before we notice this trend, we can expect demand to increase in areas near mass transit nodes.

The writing on the wall is clear.  If you’re looking for long-term property appreciation in your home, you need to consider purchasing either near a mass transit system or within the city.

Zero Down & 40 year Amortization Mortgages to End on October 15, 2008

The Department of Finance today announced that it would change some of the rules for high-ratio mortgages, and that “these requirements will apply to all government-backed mortgage insurance policies (whether issued by CMHC or private insurers) for high-ratio mortgages on residential properties with up to four units.” These rules will come into effect on Oct 15, 2008. If you are in the market and would like to avail of a zero down mortgage or a 40 year amortization mortgage, you need to act quickly. For that matter, there may be added documentary requirements for borrowers applying under stated income programmes.

Here are some highlights of the changes:

1. Maximum amortization reduced to 35 years for new government-backed mortgages.

2. Minimum 5% down payment for new government-backed mortgages. Borrowers may borrow their 5% down payment, but it will not be insured under the new guarantee framework.

3. New credit score floor of 620 for new government-backed mortgages. There will also be limited exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent a low credit risk.

4. Minimum loan documentation standards “to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income.” The Department of Finance’s announcements today did not elaborate on this point.

5. No government guarantee for high-ratio mortgages where no amortization is required in the first few years. This includes high-ratio mortgages that begin with “interest-only” payments and HELOCs.

6. Maximum of 45% on borrowers’ TDS ratio for new government-backed mortgages.

Exceptions would be allowed after October 15th where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before October 15, 2008. Canadians who already hold mortgages will not be affected by these changes.

The Department of Finance stated that “today’s announcement marks a responsible and measured approach by the government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.” It also noted that mortgage arrears in Canada have remained low in recent years.

Here is the link to the Department of Finance announcement: http://news.gc.ca/web/view/en/index.jsp?articleid=409769&categoryid=16

Treatment of Rental Income for Investment Properties

Are you looking to purchase rental property? Purchasing a residential investment property is more complex compared to purchasing an owner-occupied property. This type of mortgage is also considered higher risk. Many lenders will not finance investment properties. Secondly, the treatment of rental income from the property will vary widely from lender to lender. Thirdly, owner-occupied rental income (such as a house with a basement suite, duplex, triplex and fourplex property) is treated differently from an investment property which is not partially owner-occupied.

Here are some of the ways, lenders treat the income from a rental property

• A percentage of rental income (usually 50%) is added to the borrower’s income
  • This is the more conservative approach to using rental income for qualification purposes. This is also the most common approach used by mainstream lenders. For example, if the property can rent for $1000 per month or $12,000 per year, lenders will add $6,000 (or 50% of $12,000) to the borrower’s income to qualify the mortgage. As it often happens with mortgages (especially those in the Metro Vancouver area) that the mortgage payments are higher than the rent income. With this method, qualifying for a mortgage to purchase a rental property will require a much higher income for the borrower.
• Rental Offsets (50% – 100%)
  • A more aggressive approach is using a rental offset. With this approach, the rental income is treated as a deduction from your mortgage payments. The percentage rental offset may vary from between 50% to 100%. This will depend on the lender’s policies, whether the mortgage is an insured mortgage, whether this property is owner-occupied and of course, your overall credit.
  • Here’s an example using an 80% rental offset. Say, for example, that a property’s carrying costs (consisting of principal, interest, property taxes and heat) is $1,100 per month and the property can rent for $1,000 per month. In this scenario, the lender will use 80% of the rental income of $1,000 or $800 and deduct this from the carrying costs of $1,100. This results in a negative cash flow to you of $300 per month. If you can afford to make this extra payment, you can easily qualify for this purchase.