Not only banks are getting pickier, they’re also giving out lesser and lesser … because they can’t really ride on ‘fool’ like CMHC anymore ?
No idea how true is th allegation, but we do know CMHC is under more serious scrutiny now. And while banks are totally desperate to have as many mortgages as possible, well, who doesn’t want more business ? But they’re trying everything they can not to give out even one penny more …
Pre-approved financing may not be enough for home purchase
If you waive financing condition in your offer to purchase house or condo, you are in trouble if lender says you bid too high
Whether you’re looking for a condo or house, just make sure the value of the property you’re bidding on will be accepted by your lender – even if you have a pre-approved mortgage.
Many buyers get pre-qualified for financing before they start looking for a home. This means that they find out in advance the maximum amount that a lender will provide to them based on their income. The mistake is thinking that no matter what home you buy, the lender will just give you the money you need, provided that it is within your approval limit.
Buyers need to realize that just because a lender pre-approves you does not mean they will lend you all the money. The property you buy must, in the lender’s opinion, be worth what you paid for it.
Most real estate agreements are conditional for a few days on the buyer arranging satisfactory financing. In many cases, however, the buyer waives the condition before the lender conducts an appraisal of the home itself. Even worse, in most bidding wars, buyers do not even include a condition on financing, hoping that their pre-approval will be enough.
In the last two months, I have seen two situations where lenders requested an appraisal of the property just days before closing, and when the appraisal stated that the house was not worth what the buyers paid, the lender just cancelled the loan. The buyers had already paid the deposits and were preparing to close. Now they faced the possibility of losing their deposits and getting sued.
In both cases, we were initially able to arrange for an extension of the closing date to give the buyers time to solve their problem. In one case, the mortgage broker got creative and was able to find the buyer a new mortgage, albeit at a higher interest rate and for a shorter term than the original mortgage. Still, the deal got done.
In the second situation, the buyer had purchased a brand new condominium from an original investor, who flipped it just before closing. The original price was $200,000 when the development started four years ago, but the buyer today paid $240,000. The problem was that when the bank asked for the appraisal, the appraiser said that since other investors closed at the original price of $200,000, he would not agree that the unit had in fact appreciated to $240,000 today. The buyer was fortunate to have relatives who lent him the shortfall to close the deal.
Buyers, when you are looking at potential lenders to assist with your home purchase, ask in advance how long it takes them to do their appraisals. Many lenders can get this done within 3-4 days, so that you can have assurance that you will get all your money before you have to waive any financing condition.
Be very careful about bidding on a home without a financing condition, unless you budget an additional 10 per cent down payment in reserve, just in case the lender surprises you just before closing with a reduced loan. Being prepared will assist you in closing on time, and with the right amount of money.
Mark Weisleder is a Toronto real estate lawyer. Contact him at[email protected]
More People are Turning to Mortgage Brokers for Home Financing
Canadian home sales have done well since the recession, but there are signs of slowing. The National Bank Composite House Price Index was up just 2% year on year in April 2013. This is the smallest increase in its 15 year history (outside of the 2008/2009 global recession). *
However, index results varied widely in cities across the country. Calgary (5.5%), Edmonton (3.6%), Winnipeg (4.4%), Quebec City (6.6%) and Toronto (4.3%) all showed gains above the national average. Victoria (-3.3%) and Vancouver (-1.5%) showed home price deflation. With record low interest rates, tighter federal mortgage requirements and slower growth, the Canadian mortgage market has become increasingly competitive.
Consumers are shopping around for the best deals and recent statistics show that more people are turning to mortgage brokers for home financing. Mortgage brokers are independent, licensed mortgage specialists who are not tied to one bank. They have access to multiple lenders and are able to place AAA clients with Chartered Banks, Credit Unions and other top ranked Mortgage Lenders. They are also generally able to find home loans with more flexible requirements for those with bad credit, self employed or new to Canada.
According to the May 2013 Canadian Mortgage Market Report** prepared for the Canadian Association of Accredited Mortgage Professionals, most people are opting for fixed rate mortgages (69%). While 25% of all existing mortgages were through a mortgage broker and 57% through banks (regardless of when they were obtained) the trend to use mortgage brokers is increasing. Since 2012, 31% of consumers obtained their mortgage or mortgage renewal from a mortgage broker, while 51% obtained their mortgage from a bank.
Why the trend towards mortgage brokers? Award nominated Alberta mortgage broker Jim Black explains: “Mortgage brokers work for the clients. We analyze their financial position, risk tolerance and future goals to help them determine how much debt they are comfortable financing with a mortgage, taking into account all the closing and carrying costs. We then shop their loan across all lenders for the best product, term, rate and overall package for their needs. Generally we can negotiate better rates than consumers could get on their own.”
While home buyers may only be looking at interest rates, there are other factors they need to consider before tying themselves into a longer term home loan. “The lowest rates may have more restrictions” says Jim. “If you want more flexibility, like 20% prepayment of the principal per year, skipping or doubling payments, then the mortgage interest rate may be higher for that mortgage product. It is important that consumers understand the terms and conditions so their mortgage doesn’t end up costing more in the long run.” It is also important that they understand all their options. “Most consumers just understand rate. They don’t understand Home Equity Lines of Credits, Combination Mortgages or the All in One product. They also are not aware of how a consolidation refinance can literally save them hundreds, and sometimes thousands, per month.”
The growing trend towards mortgage brokers is not the same across all borrowers. Fewer new home buyers use brokers as many aren’t aware of alternative borrowing options. The same holds true for homeowners that have mortgages coming up for renewal. Statistics show that 66% of homeowners renew their mortgages through their banks. Jim Black explains, “Many homeowners don’t realize they can renew their mortgage with a different lender. Banks rarely go out of their way to give you the best deal on the automatic renewal card. You can save a lot of money on interest by shopping around for your mortgage renewal – just like you shopped around when you first got the mortgage. Mortgage brokers can look at the mortgage renewal your bank has offered and compare it with other lenders. You have nothing to lose by knowing all your options.” Mortgage brokers offer a free service for borrowers, so many home buyers are now seeing the benefits of filling out one application and letting lenders compete for their business.
Jim Black believes the trend towards accredited mortgage professionals will continue to grow. “Since we aren’t selling limited offerings from one institution, we can offer unbiased, expert advice to our clients. We understand that financing a home is a big decision. More than that, we understand that this is more than an investment: It is where you and your family will build memories. We just made a new video showing those sentiments which our parent company, Dominion Lending Centres, is going to be airing as a commercial on National Television beginning this fall. We are on the client’s side and my goal is to be their mortgage broker for life.”
More information on mortgages and the new video can be found at:http://www.mortgageloansalberta.ca.
- Source: House Price Index developed by Teranet and National Bank of Canada, May 2013
**Source: CAAMP’s Spring Mortgage Report May 2013