Tag Archives: pre-approval

What the new mortgage rules mean for homebuyers – There are two scenarios new buyers can anticipate

mortgage math

 

Source: MoneySense.ca – by  

 

 

Today, the Office of the Superintendent of Financial Institutions (OSFI) introduced new rules on mortgage lending to take effect next year.

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20% or greater than their home price).

The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate. “The main effect will be felt by first-time buyers,” says James Laird, co-founder of Ratehub.ca. “No matter how much money they put down as a down payment, they will have to pass the stress test.” The effect of the changes will be huge, resulting in a 20% decrease in affordability, meaning a first-time homebuyer will be able to buy 20% less house, explains Laird.

MoneySense asked Ratehub.ca to run the numbers on two likely scenarios and find out what it would mean for a family’s bottom line. Here’s what they found:

SCENARIO 1: Bank of Canada five-year benchmark qualifying rate

In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.

Under new rules, they need to qualify at 4.89%
They can now afford $570,970
A difference of $155,969 (less 21.45%)

SCENARIO 2: 200 basis points above contractual rate

In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.

Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)

If a first-time homebuyer doesn’t pass the new stress test, they have three options, says Laird. “They can either put down more money on their down payment to pass the stress test, they can decide not to purchase the home, or they can add a co-signer onto the loan that has income as well,” says Laird. The stress test will be done at the time of refinancing as well, with one exception. “If on renewal you stay with your existing lender, then you don’t have to pass the stress test again,” says Laird. “However, if you change lenders at mortgage renewal time, you may have to pass the stress test but it’s not crystal clear now if this will be the case for those switching mortgage lenders.”

So if you’re a first-time homebuyer, it may mean renting a little longer and waiting for your income to go up before you’re able to buy your first home. Alternatively, some first-time buyers will buy less—maybe a condo instead of a pricier detached home. Or, the new buyers may opt to get a co-signer to qualify under the new rules.

But whatever you do, if you’re a first-time buyer, make sure you understand what you qualify for using the new regulatory rules, and get a pre-approved mortgage before you start house-hunting. “This shouldn’t be something that shocks you partway through the home-buying process,” says Laird.

And finally, do your own research and run the numbers on your own family’s income numbers. You can use Ratehub.ca’s free online mortgage affordability calculator to calculate the impact of the mortgage stress test on your home affordability.

mortgage math

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Proposed mortgage rules aim to reduce financial risk in Canada’s hot housing markets

Vancouver has one of the hottest housing markets in Canada. New mortgage rules proposed by OSFI aim to mitigate the financial risks.

New rules proposed by the federal government to curb financial risks associated with the country’s hot housing markets could make it more difficult to secure a mortgage.

The Office of the Superintendent of Financial Institutions’ new guidelines proposed Thursday include stress tests for uninsured mortgages — loans secured with a deposit of at least 20 per cent on the value of the home.

Those homebuyers will now have to show that they can withstand a two per cent increase on their contractual mortgage rate. This would apply to variable and fixed-rate mortgages, regardless of term.

Using a million-dollar home as an example, buyers looking to secure a mortgage with a 20 per cent down payment at a three per cent interest rate would have to prove they could pay up to $4,652 per month instead of the $3,786 on their contract — a difference of $866 per month.

The changes come as the Bank of Canada looks set to increase interest rates as soon as next week for the first time in seven years.

CANADA-HOUSING/

The B.C. and Ontario governments have been using different tactics to try to cool housing prices in major cities. (Mike Cassese/Reuters)

“Persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto), could generate significant loan losses if economic conditions deteriorate,” OSFI wrote in a public letter.

But those working in and studying the real estate market say those changes aren’t likely to make a difference, especially given that those uninsured mortgages tend to be less risky because owners have already proved they have access to capital for a down payment.

What experts say will have a greater effect on housing markets is the office’s proposal to ban co-lending arrangements, or bundled mortgages, that sidestep rules designed to clamp down on risky lending.

The regulator said it is considering “expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements.”

Fear of a housing bust

Reuters reported in January that regulated mortgage providers were teaming up with unregulated rivals to circumvent rules limiting how much mortgage providers can lend against a property.

The arrangements have proliferated as Canadian regulators tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.

“Bundled” or co-lending agreements with an unregulated entity can enable lenders to offer combined mortgages worth up to 90 per cent of a property’s value. Under federal rules, regulated lenders in Canada are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or nonexistent credit records.

They also cannot lend more than 80 per cent of a property’s value — even to borrowers with solid credit — without obtaining government-backed insurance.

city of vancouver empty homes

B.C. recently implemented a tax on foreign homebuyers as part of an attempt to reduce real estate demand and prices. (Rafferty Baker/CBC)

Under rules rolled out last October, that insurance requires the banks to run income stress tests on borrowers.

“When you’re looking at excited housing markets, you’re really concerned about where the capital is coming from,” said Tsur Somerville, a senior fellow with UBC’s Centre for Urban Economics and Real Estate.

“In terms of trying to cut down on the flow of capital in the housing, in particular in Toronto and Vancouver, cutting down on the bundling is probably the most important piece.”

Somerville guessed the intention behind the new regulations is likely a mix of wanting to cool those hot housing markets and mitigate risk in the financial sector.

Mortgage brokers concerned

Grant Thomas, founder and partner with The Mortgage Group, said he was concerned about the proposed changes — especially in big-city markets where homes often sell for millions of dollars.

Thomas said bundled mortgages are probably less than a third of all mortgages, but are often used when homeowners are financing the construction of a new home or are in between selling and buying a home.

Mortgage delinquency rates in Canada remain low even in cities like Toronto and Vancouver, he points out.

“The government has been intrusive in our industry in the last three years, and they continue to be so at a rate that is probably unnecessary,” he said.

“I’m not overjoyed whenever the government involves itself in business.”

Affordable housing in Nova Scotia.

Canadian regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust. (Robson Fletcher/CBC)

Thomas said his company and Mortgage Professionals Canada are planning to spend the next few days examining the proposed changes.

The Office of the Superintendent of Financial Institutions is accepting comments until Aug. 17. It said it will finalize the guidelines and set an effective date for implementation later in 2017.

The office said the proposed changes would be guidelines that federally regulated financial institutions would be expected to follow.

 

Source: Maryse Zeidler, CBC News

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Home sellers struggling with closing complications after big chill hits market

Realtor Peggy Hill, of Keller Williams, said house closings have been stalling since the end of June. Barrie home prices may not be as high as some closer to the city, but the drop has been precipitous.

Formerly frenzied buyers are reconsidering purchases made in the heat of the market.

Barrie teacher Cheryl O’Keefe doesn’t know how she would have survived the stress-induced sleepless nights of July had school not been out for the summer.

O’Keefe is among Toronto region homebuyers and sellers who got caught in the spring real estate downturn.

When the sale on her house finally closed a month past the originally agreed-upon date, it was the end of an expensive nightmare for O’Keefe.

Others who sold their homes in this year’s once frenzied real estate market, are still struggling to complete their transactions.

Lawyers, realtors and mortgage brokers report a surge in calls from distressed sellers whose buyers purchased in the heat of the market, only to find that the subsequent drop in the home’s value is more than the cost of walking away from a deposit.

Others, who bought unconditionally, have discovered they can’t get the financing to meet their purchase obligation. In some cases, the bank appraisal has come in at a value below what a purchaser agreed to pay, leaving the buyer scrambling to make up the difference.

O’Keefe’s real estate agent, Peggy Hill of Keller Williams, says closings have been stalling since the end of June. Barrie home prices may not be as high as some closer to the city, but the drop has been precipitous.

“Our average price for a home in Barrie is $471,822 for July. In March it was $570,199. We’re talking about a $100,000 difference,” she said.

That is still $40,000 above the average price of July 2016. But back then, 208 of the 260 homes listed sold. “This July we have 201 sales so the sales are still there but with 683 active (listings),” said Hill. “That’s the real picture.”

The GTA-wide picture is similar. When the regional market peaked in April, the average home price — including every category from condos to detached houses — was $919,449. By July, it had fallen to $746,216, although prices were still up 5 per cent year over year.

There were 9,989 sales among 11,346 active listings in July of 2016, according to the Toronto Real Estate Board. This July, listings soared to 18,751 listings, with only 5,921 sales.

O’Keefe had lived in her bungalow for only about two years when she decided to sell it in February, about the time property prices were peaking. Her basement apartment was standing empty and she wanted to downsize.

The real estate frenzy in Barrie mimicked Toronto’s and most of the 43 showings of O’Keefe’s house were, in fact, people from Toronto.

Like many homes at the time, O’Keefe’s sold in about a week for more than the listed price. The buyer put down a $25,000 deposit and requested a longer-than-usual four-month closing date of June 28.

“That was fine. It just gave me more time to do what I had to do,” said O’Keefe.

What she had to do was find a new home for herself in the same fiercely competitive market. She lost a couple of bidding wars and turned her back on a century home she loved because she knew it would go at a price she could never justify.

When she happened on an open house that fit her needs, O’Keefe bought it with a May 28 closing — a month ahead of when her own home sale was to be finalized. She arranged bridge financing to cover both mortgages for that month.

It all looked good on paper. But as the spring wore on, O’Keefe grew uneasy. The buyers of her house had not requested the usual pre-closing visit. Usually, excited new owners want a look around.

O’Keefe got her realtor to call. No response.

A week from closing, she had still heard nothing. At 4:50 p.m. on closing day, her lawyer talked to the purchaser, who admitted he was having difficulty with the closing.

By then, O’Keefe had been living in her new place a month and was paying two mortgages.

She agreed to extend the closing to July 14. When that didn’t happen, O’Keefe agreed to a second extension to July 31. The date came and went. Finally on Aug. 2, her lawyer called to say the buyer closed.

“Every step of the way everything that could be a headache has been a headache,” she said.

O’Keefe’s realtor says that so far, in her office, even problematic closings have been finalized. But some have been disappointing.

“There have been deals where we’ve had to take less commission. The seller had to take less money to make it close because at that point they’re euchred.

“It’s usually $40,000 to $50,000 because of our price point. In other areas I know it’s in hundreds of thousands of dollars,” said Hill, referring to areas such as Richmond Hill, Newmarket and Aurora, also hard hit by the market’s downward slope.

Some buyers have requested extensions on new home purchases because their old places didn’t sell, said Hill.

“That’s understandable,” she said. “In March, you wouldn’t dare go in with an offer conditional on the sale of a home. The problem is, in April, when all hell broke loose, everybody started putting their houses on the market fearing they had missed the top.”

Many have arranged bridge financing and moved on. But others haven’t been as fortunate, said Toronto lawyer Neal Roth.

He has been getting about five calls a week since mid-May from home sellers struggling to close on transactions.

“There is this horrendous domino effect going on where people in the spring were rushing into the market for a variety of reasons, committing to prices that in some instances were well beyond their means,” he said.

Most of his callers represent one of two scenarios.

First, there’s someone paid $1.5 million for a house that has since become worth $1.4 million, so they want to get out of the purchase.

“The other type of person says, ‘The bank promised me 60 per cent financing. Now that I’m at $1.5 million I should still get the same 60 per cent, not realizing that you have to come up with the 40 per cent of your own cash, or that the bank said 60 per cent when you were at $1.2 million, not $1.5 million,” said Roth.

While he thinks some sellers got greedy and some buyers should have been more careful, he hasn’t encountered anyone who got caught playing the property market.

“They’re all average people. None of them have been speculators as far as I know,” he said.

It’s not uncommon for mortgage brokers to hear from home buyers struggling with financing, said Nick L’Ecuyer of the Mortgage Wellness Group in Barrie

“But what we’re getting now is people who are in sheer turmoil. They don’t know what to do at all,” he said.

Some sellers, who planned to use their equity to put down 20 per cent or more on another home, don’t realize they can’t get bridge financing from a bank if they don’t have a firm purchase agreement on their old house.

Then there’s the hard truth that the house they’re selling isn’t likely to go for as much as they expected earlier in the year.

They can put down just 5 per cent and apply for a government-insured mortgage, but that’s more complicated and costly, said L’Ecuyer.

The Appraisal Institute of Canada doesn’t have statistics on the number of lender-commissioned appraisals that come in short of the agreed-upon price of a home.

But based on anecdotal accounts, it’s happening more now in the GTA, said institute CEO Keith Lancastle.

“Any time you go into a situation where you make an abrupt change from a seller’s market to a buyer’s market — where you see a slowdown for whatever reason — you can encounter this situation,” he said.

The role of an appraiser is to provide an unbiased opinion of a property’s value at a given point of time.

“A heated market does not automatically translate into a true market value. When you take away the heat, all of a sudden it settles down into something that is perhaps more reflective of what true market value is,” said Lancastle.

He says he’s still surprised by how emotional what is routinely now a million-dollar home buying experience can be.

“It’s arguable that mortgage lending should not be underwriting that emotion and that notion of a sober second thought is really important, not only for the purchaser, but also for the lender,” he said.

Buyers tempted to walk away from a deposit need to realize that they may still face a lawsuit, says L’Ecuyer. If you bought a house for $500,000 and decided to forfeit the deposit, and the seller gets only $450,000 from another buyer, you can be sued for the difference, he said. There is also the possibility of being sued by a realtor who isn’t getting a commission, and for additional legal and carrying costs.

Roth said there are people who don’t even realize that when they back out of a sale, their deposit is automatically lost.

O’Keefe believes that because she priced her home on the low side, it hasn’t lost any value. “You start talking to people and this is happening to so many,” she said. “I’m lucky that my house closed.”

Source: Toronto Star – 

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Unravelling The Mortgage Challenges Of Going From Pre-Approval To Approval

MORTGAGE APPROVAL

Pre-approval and approval are terms we hear thrown around a lot in real estate, and yet all too seldom do homebuyers know what’s necessary to secure one in the first place. The fact is, a pre-approval should be one of the first steps in the property search process.

As the real estate market in B.C. continues to sweep along at its dizzying pace, many have been left scrambling to make subject-free offers without a pre- approval in place. This, of course, complicates things even when the live file is submitted. During the pre-approval stage it’s important to be upfront and provide accurate information so that your broker and the lender are aware of any possible challenges ahead. Once you have your pre-approval, the more constant everything stays, the better your chance of getting the approval when the time comes. Complications of pre-sales, co-signer’s, or an unexpected life change are some of the few things that can cause your pre-approval to be declined at the last minute.

CO-SIGNER/ GUARANTOR

Co-signers or guarantors can be a tricky business. Quite often, particularly among younger people who haven’t had time to build up a long credit history or stable income, a co-signer may be required by the lender to strengthen the application. It’s important to remember that not all co-signer’s are created equally and, there is just as strong a chance that a co-signer/guarantor will be turned down as there is that you will be by the lender.

Assuming someone has agreed to be your co-signer, this alone is not enough. They will needs a strong credit score, as co-signing or guaranteeing a loan will increase their debt load and it’s their responsibility to pay off the debt if you default. Added to that, if they are asset heavy but have no consistent salary or income base, this will not be looked upon favourably by the lender and you may be turned down for the loan.

When looking for a co-signer, think like a lender. Do they have stable income? Are they in debt? What is their debt-to-income ratio? Have they co-signed for anyone else in the past and, if so, did they take on any additional debt as a result? The more you know about your co-signer, and the more prepared you are with paper evidence of their financial status, the better chance you stand for the approval. Most importantly, if you plan on having a co-signer or a guarantor, their situation must also remain constant as they are really treated as another applicant on the same loan.

PRE-SALE

A pre-sale is when a buyer purchases a property that has yet to be finished, and the majority take place before construction has even commenced. Particularly in a highly competitive market like Vancouver, one of the most attractive features of a pre-sale home is that despite the down payment, you have extra time to cobble together the amount of money you will need to close. For those whose current credit is preventing them from obtaining a mortgage, this extra time can be a welcome and important opportunity. In addition, buyers can often reap the benefits of climbing market value before they even put a dime into a mortgage, strata fees or property tax.

In the case of obtaining a pre-approval, that same time frame that is so attractive for building income can be the very thing that hinders you most. With a pre-sale, usually you are required to put down 15-20 per cent in stages, although here in B.C. some developers are now accepting five per cent from first-time homebuyers who are approved or pre-qualified for a mortgage. However, it’s important to remember that with a pre-sale your broker cannot usually hold the rate for too long; much less until project completion.

With the typical pre-approval letter at a maximum of 120 days, and some lenders doing a pre-approval for pre-sales up to a year in advance, what your broker may be able to provide you with would not hold until the project is complete. Sometimes, the lender financing the project can offer a pre-approval until the completion of the project. However, they will be using higher rates to qualify so if you are tight with your current income and debt level, you would most likely not qualify with the higher or posted rates.

If contemplating a pre-sale, make sure to be realistic about the completion date. Mortgage rules change often and there is no guarantee that the rules or your situation is unchanged at your completion.

UNEXPECTED CHANGES

We have all, at some point, found ourselves in a situation we didn’t anticipate. Whether it’s loss of a job, a decrease in salary, health problems, or any other number of new adjustments such as getting a car loan. But changing jobs, adding debt, and moving around your down payment money can not only affect your pre-approval — it can void it, as it may push your ratios overboard.

Think of a pre-approval as the lender approving your file based on your current condition and any changes will jeopardize that approval. Any variance in your income or debt level is an immediate alarm to the lender, and will affect your pre- approval.

Pre-approvals can be extended with an updated credit bureau and information. If you are actively looking for a home, it’s best to do everything in your power to remain as financially and professionally stable as possible. In other words, if it’s your dream to open your own business, you may want to reschedule that for a couple years down the line. Being realistic and planning ahead are two of the best incentives to guarantee that you are eligible for the mortgage when the time comes.

Source: Huffington Post   Mortgage Professional, Thinking Outside The Branch

MORTGAGE APPROVAL

 

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