Every several weeks I hear from a new client that had been pre-approved at their bank/credit union, but when they had an accepted offer, they were declined or told they needed to increase their down payment. This is usually because the pre-approval was based on discussions and not on documents (I may need to copyright that).
If a lender doesn’t underwrite the application up front, they wouldn’t know if the client is on probation, how they filed their taxes, or if they have outstanding collections. There are many types of documents that we review when underwriting a file: paystubs, letters of employment, T4’s, T1’s, NOA’s, 90 day history of down payment funds, and their credit application. We look at pay stubs, and make sure the year to date earnings are on track to hit what the job letter says. We review probationary periods, call the job letter to see what HR will say, and address any past collections or late payments.
How taxes are filed for commissioned employees, employees who work overtime, and the self-employed can have a significant impact on the pre-approval amount, so I ask the questions up front and review their tax documents before issuing a pre-approval. For example, a client may tell you that they make a $100,000 per year, but aren't aware that all of the write-offs and business expenses that reduce their taxable income to $55,000, means that their qualifying income for their mortgage application is now $55,000. The amount of house that you can buy with an income of $55,000 is drastically less than an income of $100,000 (e.g., 5% down and minimal debts lets say $240,000 compared to $420,000).
By reviewing everything up front ( make sure that we have taken out any of the guessing, and can confidently tell my client that they are pre-approved. I get all documents up front. I pull credit up front, I ask the “tough questions” up front. If they are paying spousal support/child support payments, I get those documents up front. I review the tax documents up front and coach clients on how to handle their current debts in order to maximize their purchasing potential. It may be more work up front, but there will be no surprises, and the clients will have a concrete pre-approval. This will reduces the stress during the financing window because we will have the majority of the documents all ready to go.
Clients that are on work permits or student permits and have been in Canada longer than 5 years have very limited lender options. Genworth and Canada Guaranty will not insure the mortgage when an applicant has been in the country longer than 5 years and has not yet obtained their permanent residency status. If the applicants are putting down less than 20% that leaves us with CMHC, and we all know their qualifying guidelines (e.g., debt service ratios) are more stringent than the other two insurers. Even though CMHC is okay with this scenario, the majority of lending institutions will still not lend to clients who have been in Canada longer than 5 years that do not have their PR. Also note that most lenders will want the applicants to have at least 6 months remaining on their work permits following the possession date. I do have several lenders that will look at the file even if the clients have been here longer than 5 years, but they need to be strong on paper. If you have clients on work/student permits, I will gladly review their documents with them and let you both know their options.
The real estate market is on fire right now, and with limited inventory and competing offers, clients and realtors are trying to make their offers more appealing to the sellers, I get a lot of questions about the financing condition, and if they really to include one in their offer. Here is why I tell my clients to include a financing condition.
However, when it comes to the property, the approved value and the history of that home are out of my hands. In some cases, homes have been former grow ops, or have had significant structural issues that may not be visible to the eye, or that have not been disclosed on the listing (the sellers might not even be aware of the issues). This is why I always recommend a financing condition and home inspection. I can confidently pre-approve you, but not the property.
Please reach out with any questions, and know that I will always do whats best for you.
Do your clients ever complain about having to go through CMHC/Genworth/Canada Guaranty when they don’t have more than 20% down? Did you know that insured mortgages (when a client puts down less than 20% and has to pay mortgage default insurance) can actually get interest rates lower than those clients that put more than 20% down? With an insured mortgage the lender knows that they can get their money back if the client defaults, and therefore some lenders will actually reward the clients by offering them a lower interest rate. When clients put down more than 20%, lenders will often pay the mortgage default insurance premiums themselves, and then increase the interest rate to recoup that cost.
So you can always tell your client going through CMHC isn’t all that bad, and that they could actually get a lower rate!
Purchase Plus Improvements
I’m sure you and your clients often come across homes that are almost perfect, but need a little work. The Purchase Plus Improvements program is great if the clients have room in their debt service ratios (how we calculate the amount they are approved for) because they can add up to $40,000 to their mortgage for renovations. Prior to closing the clients have to have quotes from contractors or quotes on materials if they are going to do the work themselves. If the lender and insurer approves it, the funds get added to the mortgage, and sit in trust with the lawyer until the work is completed. Once the renos are completed (most insurers/lenders want them done within 3 months), the insurer often sends in somebody to confirm the work was done before instructing the lawyer to release the funds. So…. This means that your client needs to either pay for the materials or work up front with the contractor, or they can work with a contractor that is familiar with the program and will accept payment upon completion. I have a list of contractors that are familiar with the program and take payment after the funds have been released.
Check out the Genworth page for a quick video on the program, and let me know if you have any questions!
With the uncertainty that seems to hang over almost every aspect of our lives right now, it is understandable that many Canadians are not sure if now is a good time to buy or sell. When it comes to the current state of the real estate market, I defer to the real estate professionals. However, here is some information on what you need to know about qualifying for a mortgage during the pandemic.
Permanent full-time applicants & self-employed applicants
If you are still working and have permanent full-time employment, then qualifying for a mortgage is business as usual. For self-employed applicants, typically lenders and insurers ask for 2 full tax years to establish an average annual income. In recent weeks, depending on the industry, some self-employed applicants have also had to produce recent invoices and proof of bank deposits to show that they are still operating their business.
Applicants receiving government assistance
At this point, CMHC and the other insurers are not using government assisted income as qualifying income for mortgages. If an applicant has been laid off and is receiving EI, we can't use that income, nor the income the applicant will be receiving when they are back at work. This can drastically affect the mortgage approval amount and can hinder an applicants ability to switch lenders to take advantage of a lower interest rate, as they need to have qualifying income in order to switch lenders. In some cases we may be able to use EI as qualifying income for seasonal employees that are typically laid off this time of year and have a return date set in stone,
Please reach out if you have any questions or need help navigating these challenging times.
During this pandemic, many clients and friends have been asking me what is going on with mortgage rates, and they always assume that interest rates are continuing to drop based on the markets. However, with all of the economic uncertainty, and the fact that over 1 million Canadians have filed for Employment Insurance, lenders and investors are worried about increased insolvency. With large increases to risk premiums, lenders are having to spend more to borrow the funds to mortgage clients which is why we have seen most low promotional rates expire. Right now fixed rates are comparable to the mortgage rates we had in February before this hit North America (between 2.69%-3.24% depending on the type of mortgage needed).
In regards to variable rates, the Bank of Canada dropped the overnight lending rate 3 times since the onset of the COVID-19 pandemic, and the majority of lenders have dropped their Prime rates in the days following those rate drops:
Over the past several days many financial institutions have quietly increased their fixed mortgage rates, increased their Prime rates, and decreased discounts from Prime. If you have been reading my blog or listening to my ramblings on Instagram or Facebook, these rate changes may baffle you based on everything I've told you about how rates are set. With the 5-year Canada bond yields continuing to drop, and with the markets crashing we would expect that rates would continue to drop, or at least stay put.
Economist Dr. Sherry Cooper explains why rates are going up while the markets continue to suffer: "over the past two weeks, liquidity has dried up. Financial instability has risen sharply with the high level of volatility. Banks have experienced significant withdrawals as consumers are hoarding cash like everything else. The cost of funds to banks has risen sharply because of the enhanced perception of risk. With the collapse in oil prices, banks exposed to the oil sector are building up reserves for nonperforming loans."
So even though the Bank of Canada issued a second emergency reduction to the Overnight rate by 50 basis points to increase liquidity on March 13, financial institutions are concerned about unemployment rates and the risks associated with taking on new mortgages with mortgagors that could see reduced hours, work stoppages, and increasing unemployment numbers.
With all that being said, rates are still lower than they have been for over a year, and I am showing clients 7 and 10 year fixed rate options to capitalize on low fixed rates. Additionally, I have been assured by my lenders that their underwriters are working remotely and are able to continue with business as usual. Take care of yourselves, and don't hesitate to reach out with any questions. I am working from home, and can get a mortgage done remotely without a client having to meet me in person.
With all that being said, the most important thing is for all of you to stay safe, spend time with your family, and remember to exercise and eat well.
Please reach out to me if you or a family member are encountering financial difficulties as a result of COVID-19 and aren’t sure of your next steps. To help Canadians who are struggling to make their mortgage payments, most lenders are offering customized payment plans and potential deferred payment options.
If you are a client of mine I can send you your mortgage number that will help speed up the process. If you aren't a client of mine, still reach out and I can help you navigate the process. Be patient, as the lenders are dealing with higher than usual volume, and let me know if you need anything else. Here are the customer service phone numbers. Stay safe!
B2B 1 800 263 8349
Connect First 403-736-4000
Chinook Financial 403-934-3358
First Calgary Financial 403-736-4000
First National 1-888-488-0794
Home Trust 1-855-270-3630
National Bank 1-888-835-6281
Street Capital 1-866-683-8090
Crashing stock markets, plummeting oil prices, and fears over the COVID-19 pandemic have resulted in multi-year lows in mortgage interest rates, making it an excellent time to consider buying or refinancing your mortgage.
Since most lenders have dropped their Prime rates by 1% in the last 3 weeks (from 3.95% to 2.95%), clients with variable rate mortgages are seeing significant decreases to their mortgage payments, as variable rates go up and down with the Prime rate. For example, you may have a variable rate of Prime minus 0.75 meaning that today your rate would be 2.20%.
Fixed mortgage rates continue to drop and are between 2.39% - 2.69% for 5 year fixed terms. The lowest rates go to clients with insured mortgages (less than 20% down), and clients with conventional mortgages or rentals will have rates around 2.69%. To put this in perspective, last year at this time the most competitive rates were between 3.19%-3.39%.
Keep in mind however, that rate is only one small piece of the mortgage discussion. Making a mortgage decision solely based on rate can be a costly mistake if you aren't fully aware of what you're signing up for, especially when it comes to break penalties. All lenders calculate penalties differently, so it is important to review all of the conditions before selecting a term.
Now is a great time to consider buying, or refinancing, as the mortgage rates are the lowest that they have been in years. I will help you navigate all of your options, and will break down the differences between fixed and variable terms, and will help you choose the type of mortgage that is best for you.
Paul holds a Master's degree in Business Administration, loves to golf, watch hockey, and drink black coffee.