Financing Your Purchase

This topic has been addressed first for one VERY good reason… You MUST get pre-approved for a mortgage before shopping for a home. I cannot stress enough the downside of not knowing your financial position before falling in love with a house. I think the diagram below shows it clearly:

no mortgage vs mortgage_edited-1

 

You need to make an appointment with a mortgage lender (ask your REALTOR® who they recommend, or see your banker that you feel comfortable with). Getting pre-approved means that your lender will add up all the numbers including your down payment, your income, and your monthly obligations to see how much is left over to actually pay for a mortgage, property taxes, utilities and maybe even condo fees.

Pre-Qualification Certificate

You should ask for a “PreQualification Certificate” if not offered one once your pre-qualification is approved. This shows the lender’s commitment to lend you a mortgage (for up to 90 days of approval) and assures your REALTOR® that you are ready to shop. Even if you are Miss “money bags” and have always had R1 credit rating you are never TOO good to carry around one of these certificates. When fighting it out in multiple offers for the house you can’t live without, this piece of paper can come in very handy, especially when your competitors DON’T have one. Ask your lender to show you exactly what your mortgage payments will look like as in how much and for how long. Use the worksheet in the “Carrying Costs” chapter to visually see your financial outlay.

prequal cert page 1_edited-1

prequal cert page 2_edited-2What if You Have Bad Credit?

Financing can be much more difficult to acquire if you have bad credit. You should know off hand if you are making all your credit payments on time and whether you carry high balances, etc. A credit score is how a lender rates your credit worthiness. Usually the score will fall between 500-900. 500 being the worst and 900 is nothing short of going straight to credit heaven.The bank, if you are approved, may charge you a higher rate of interest for your mortgage and/or require a higher downpayment if your credit score isn’t good. If you are planning your purchase in advance and you are not sure where you stand, do order a copy of your credit bureau from Equifax (www.equifax.ca) and from Trans Union (www.transunion.ca). This is a good measure to take in advance so that you can correct anything that could cost you big bucks in trying to secure financing for your future home.

What is CMHC?

CMHC is insuring the amount of money the home-buyer borrowed from the bank for the mortgage. The home buyer pays the CMHC premiums. CMHC mortgage insurance does not cover fire, health or title and deed. CMHC is in place to protect the financial institution who placed your mortgage in case of default or foreclosure. In the event of foreclosure, the lender takes possession of the property and sells it to recover the remaining mortgage amount. Should the property sell for less than what is owed on it, CMHC pays the outstanding balance to the mortgage lender.

Lenders require mortgage loan insurance for loans made to anyone that wishes to purchase a home under $1,000,000 with less than 20% of the purchase price. The Canadian Bank Act prohibits most federally regulated lending institutions from providing mortgages without mortgage loan insurance for amounts that exceed 80% of the value of the home or purchases with less than 20% down payment.

Through your lender, CMHC Mortgage Loan Insurance enables you to finance up to 95% of the purchase price of a home. Loan to Value refers to the percentage of the purchase price of the home you are financing. The premium is charged on your mortgage amount.

Therefore if you are financing 65% of the purchase of a $400,000, your mortgage would be $260,000, the premium of .60% = $1560 would be charged right onto the mortgage at the time of financing (taxes are extra and charged separately).

Conversely if you are putting down only the minimum of 5% of the purchase price, your premium would be $11,970.

 

Loan-to-Value Ratio                                  Standard Premium (Effective May 1st, 2014)

Up to and including 65%                                  0.60%

Up to and including 75%                                  0.75%

Up to and including 80%                                  1.25%

Up to and including 85%                                  1.80%

Up to and including 90%                                  2.40%

Up to and including 95%                                  3.15%

90.01% to 95%

Non-Traditional Down Payment                         3.35%

 

What does TDS and GDS Mean?

This is something you SHOULD know as you will definitely hear your mortgage rep rhyming it off in front of you. This is a preliminary step to knowing whether or not you can afford the financing given your current financial situation.

Gross Debt Service

The GDS ratio looks at your new housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable) in relation to your income (before taxes). This amount should be no more than 32% of your gross monthly income.

 

GDS MATH

 

Total Debt Service

The TDS ratio looks at your total debt obligations (including housing costs, loans, lines of credit, car payments, and credit card bills) in relation to your income. Your TDS ratio should be no more than 40% of your gross monthly income.

 

TDS MATH

Including Financing as a Condition of the Purchase of a Home

If you need to borrow funds to purchase a home, when should your REALTOR® waive financing as a condition on a sale?

NEVER!

There is a very good reason for this. Up until late, financing a home has been pretty straightforward. Recent lending policies have become more strict. You may pass the lending test with flying colours AND acquire a pre-qualification certificate, but that doesn’t mean the bank or CMHC (if applicable) wants to lend on the actual house you are buying. For this reason alone, caution must be taken when waiving your financing.

Once you have a sale which is conditional on financing, you need to contact your lender as soon as possible. They will require some property details, the Purchase and Sale Agreement and a copy of the MLS listing. They will likely order a bank appraisal which will take place within days of the sale. You will need to provide your REALTOR®’s contact info so that they can provide the selling REALTOR®’s contact info so that they can make an appointment with the sellers to allow for the appraisal to take place in their home (see why you have to contact your lender right away???).

The appraiser will determine the bank’s opinion on the market value of the home and how much you SHOULD be paying for it. A variance of a few thousand is not a big deal. But there are times when the appraiser may want to give the buyer’s head a shake and deem the property worth much less. If the appraisal comes up short of the sale price, you may have to cough up more money to bridge the gap between what you were going to pay for it and what the bank thinks you should pay for it. If you have truckloads of money sitting around to pay the extra funds required to save the deal then go ahead and waive financing. If you do not then I advise you leave that condition in the sale until the bank has done their due diligence and guarantees you the mortgage.

You home inspection or other condition fulfillment that could require costs should be scheduled for a date after you know you will be approved for your financing. Otherwise you have spent $400 on an inspection on a home you can’t buy.

Financing Programs you should know about

(in effect 2014, subject to change)

Spousal Buyouts

In the past, if one spouse was going to be staying in the matrimonial home and would be buying out the other spouse (the amount is typically half of the equity in the house), it would just be a matter of refinancing (increasing) the current mortgage by the amount required to pay the other spouse.  In the process, the spouse that was leaving would be removed from the mortgage and the title of the home.  In that case of course, the spouse that is staying in the house would need to re-qualify to keep the mortgage in their name only.  All of the above is still true, however the difference between the past and present is that there are now rules that only allow a mortgage to be increased to 80% of the value of the home.  Therefore if there is not enough equity up to 80% of the value to pay out the other spouse, many people are told that this can not be done… which isn’t exactly true.

At this moment there are a few mortgage lenders that will offer a spousal buyout program.  This program allows for the spouse that is staying in the house, to access up to 95% of the value of the house, in order to pay out the spouse that is leaving.  It would be recommended to talk to a good mortgage broker to find out how this program works.

No Down Payment Programs

This year the minimum down payment to purchase a home in Canada is 5% down.  Having said that, there are some mortgage lenders that will give the buyer the 5% down payment as a cashback… we all know that banks do not give money for free, so what’s the catch?  The mortgage rate is typically a couple of percentage points higher.  Having said that, it is worth noting that the mortgage amount is not 100% of the purchase price… it is only 95% of the purchase price.  Therefore, yes the interest rate is higher on mortgage, however the mortgage lender does give the buyer the down payment.

Not all mortgage lenders can offer this program, however some still do.  It is recommended to talk to a good mortgage broker to find out more information on this program, and if it is still available.

Purchase Plus Improvements

Since the mortgage rules have changed with regards to only being able to increase a current mortgage up to 80% of the value of a home today, this has made it difficult for someone to purchase a house with 5% down for example, and then refinance their mortgage 2 or 3 years later to do improvements on that home.  The reason is because the mortgage may still be over 80% of the value at that time, and therefore it can-not be increased until the value of the home has increased more, or the mortgage has been paid down more.  Enter, a new advantage of the purchase plus improvement program!

This program allows for home buyers to do improvements on their home as soon as they purchase it, and for the cost to be added to the mortgage from the start of the mortgages life.  Typically the maximum amount of improvements allowed is either $40,000 or 10% of the as-improved value of the home, whichever is lower. (If you want to do more improvements than that, it may need to be done through a construction program mortgage.) Therefore if you purchase a house for $190,000, and want to do $10,000 of improvements which will increase the value up to $200,000, your $10,000 of improvements represents 5% of the as-improved value and therefore you are within the limits of the program.  Normally to be approved for this program you need to provide quotes for the work to be done, to the mortgage lender or broker, so that they can approve the full mortgage with the improvements at the time of arranging financing.  One caveat to this program is that the work often needs to be completed before the improvement funds are advanced.  Therefore you may need to pay for the improvements upfront, or arrange for your contractors to wait for payment until they are done the work.

Mortgage Program information provided by: Kurt Henry, AMP, Mortgage Broker, Lic# M08000655, 905-436-8010, The Mortgage Centre, durhammortgage.com.