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The-Mortgage-Gal

Be ready when life happens

“I wish I’d known about these options a year ago. I went to my bank and they said there was nothing I could do, that I should just sell my car or lose my house.”

These conversations break my heart. And they happen more often than I like.

This young lady called me two weeks ago. After a quick conversation I emailed her a list of documents to gather and I met with her the following day.

Here’s the scenario:

  • She owns a home in downtown Kelowna worth about $600,000
  • Her mortgage balance is $195,000
  • She owes about $20,000 on a vehicle loan and $35,000 on a credit line
  • She has been off on Long Term Disability for almost two years, but will be returning to work in the next six months or so; this income is about $20,000 a year less than her employment income

Initially, she managed OK on the reduced income. Over time, life happened. She needed to replace her hot-water tank. The cost of utilities increased. She supplemented her income by drawing on her credit line. The balance crept up.

She went to her bank a year ago to see if they were able to refinance her mortgage. The person who took her application said that she did not qualify and that she had better sell her car or lose her house.

A year went by. She fell behind on her cell bill, loan payment, and eventually her mortgage payment.

She went back to the bank and again was told she had no options. This was a horrible day as she realized she had hit the end of what she could manage. She thought she was indeed going to lose her home.

Later that night, she confided in a friend, who asked if she had spoken with a mortgage broker. They found my page through Google and she reached out the following day.

With as much equity as she has in her home, she does indeed have options outside of the traditional bank mortgage.

After putting her application together I approached several B lenders with her application. Because she had missed mortgage payments over the last year, I had a tough time finding the right fit.

I did find a B lender that indicated that they would happily approved the file once she had six months without missing a mortgage payment.

The next route was to look for a private mortgage to clean up her mortgage arrears, outstanding cell phone collection, and the vehicle loan that was also in arrears.

Within two days, we had an approval subject to the appraisal coming in at $400,000 or more. The lender built in a small cushion to cover any emergencies that may come up in the next year.

She signed off the documents the following day and is just waiting for the appraisal to be completed. Once that is signed off, she should have everything cleaned up next week.

This is step one of a three-step plan to get her back in to a mortgage with an A lender. After six or seven months go by, we will be approaching the B lender to refinance her current mortgage to payout the private mortgage.

After a year has passed, assuming she stays on track and is back to work, we will be approaching an A lender again.

This is by no means my preferred route to help clients clean up their finances. Had I met this client a year ago, this likely would have been a two-step process – move to a B lender for one year to re-establish clean credit, then back to an A lender.

I used to avoid private mortgages at all costs. I felt I was doing clients a disservice as they involve fees and higher rates. However, sometimes they serve a purpose.

With the new mortgage qualification rules (Stress Test), I am running into more situations where clients do not qualify to refinance and pull equity from their homes. I’ve worked with three similar clients in the last month alone.

It’s all well and good to say that the new rules are designed to protect Canadians from over-extending themselves. What’s interesting to me is that in all three of these recent files, we’ve needed to consolidate (for the most part) credit cards that were approved with no Stress Test and minimal checks for approval.

Under the old mortgage rules, all three of these clients would have qualified for a refinance of their mortgage.

Life happens. If you are in financial crisis and do have significant equity in your home, reach out sooner rather than later for help. If your credit is still clean you have many more options to get you back on track.



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Spec tax not right fit

Since the B.C. government tax re-defined the areas affected by the Speculation Tax, I have been concerned about the impact it will have on our housing market here in the Okanagan.

Most people have an opinion about the Speculation Tax.

I expect there will be more changes before it comes into effect next year.

I see a difference between targeting foreign investors who are truly speculating and driving prices up, and including families who spend considerable time and money in our community during the course of the year.

The province’s website states “Targeting Speculators / Exempting 99 per cent of British Columbians." I’m pretty sure the first few clients I’ve seen affected feel that the tax has missed its mark.

The impact in Kelowna has been immediate. And I’m not sure if the people feeling the change are the ones targeted by the tax.

I have been working with a young family looking for a larger home as their family has expanded. They have been searching for months to find something suitable in their price range.

The stars aligned – they received an offer on their current townhouse and made an offer on a larger home. Both offers were solid and on the home stretch to having all subjects removed when it was announced that Kelowna would be subject to the Speculation Tax.

The buyer of their home walked away. The buyer lived in Alberta and had planned to split their time between Fort McMurray and Kelowna. Their lawyer did some research, but could not find a definitive answer (for their specific circumstance) as to whether they would have to pay the new tax or not.

My clients lost out on the home they’d made an offer on as the sellers were not interested in extending the contract. My guess is that the sellers of the home they were trying to buy already had an offer in play on another home as well.

Regardless of where you stand with respect to out-of-town buyers, people who own vacation properties here contribute to our economy. Hospitality and retail businesses benefit directly. Although I don’t have hard facts to back this up, I wonder how much trickle down there will be on local businesses.

Until I read an article on CBC about Squamish Mayor Patricia Heintzman asking that Squamish be added to the areas included in the tax, I hadn’t thought too much as to how the program would affect other areas of the province.

Her concern is that people will be looking to buy in Squamish to avoid the tax, and prices will rise disproportionately and create more of a housing shortage. Lack of affordable housing is already a concern for the area and this new dynamic (she feels) will make it exponentially worse.

That brings me to our area. Kelowna and West Kelowna are, at this time, subject to the tax. Penticton, Lake Country, and Vernon are not.

Affordable housing is already at a premium throughout the Okanagan and driving purchasers from Kelowna will likely create a more significant issue in the smaller communities.

According to the province’s website, “the speculation tax will help make sure British Columbians can afford to live in their own province." I’m not entirely sure that this is the right fix.

Does something need to be done to help create affordable housing, whether to rent or buy?

Absolutely.

Do I think this new program was rolled out without adequate consultation or consideration of the fall-out?

Absolutely.

It will be interesting to see what happens with our housing market over the next few months.



Five Cs of Credit

If you’ve never owned a home, figuring out where to start can feel a little overwhelming.

Over the last week I’ve talked with two couples who have decided they would like to buy.

The conversations were a little different. One couple has been together for almost two years, but live in different communities; the second couple has been married for many years, but never owned a home.

Neither couple had any idea where to start and what they needed to organize.

For the young couple starting out, the first thing I suggested was having a heart-to-heart conversation — full financial disclosure — discussing what they earned, owned, and owed.

I suggested they talk specifically about what type of home they wanted and how much they were comfortable paying for a monthly mortgage payment. Which area of Kelowna did they want to live in?

They also needed to talk about how they would cover house-related expenses. Would they be merging finances completely? Would they be splitting everything 50-50?

My conversation with the married couple was slightly different. Their finances were already joint and there were no financial secrets. Their wish list is simple. They want a small home with a yard for a cherry tree and room for a small garden.

From there, the conversations were pretty similar. We talked about whether they were ready to apply now, or whether they have homework to do first.

With both couples, I reviewed their current situations to see how they met the basic criteria that lenders look at.

There are five basics that lenders look at when considering mortgage applications. These are often spelled out as The Five Cs of Credit:

  • character
  • capacity
  • capital
  • collateral
  • conditions

CHARACTER

Lenders review your credit history to determine your credit worthiness. They look at how you have handled credit in the past. Have you made all your payments on time? Have you demonstrated that you use credit responsibly and pay your debts as agreed?

To buy a home, you need to have established at least two different credit facilities. These can include credit cards, vehicle loans, or lines of credit. Newer cell phone accounts also report on your credit bureau and will also be considered.

If you do have credit cards or lines of credit, use them regularly and either pay them in full or try to keep them at balances lower than their limits. This shows that you use your available credit responsibly.

If you have battled with a creditor in the past and taken a stand and not paid – this may come back to bite you. If you have done this and subsequently paid it in full, keep your receipts in case your credit report was not updated correctly.

This can sometimes make or break a mortgage application.

CAPACITY

Lenders assess your ability to repay your mortgage. They look at your salary and employment history, as well as any other outstanding debts you have.

Long-term stable employment is considered a strength; if you job-hop on a regular basis lenders may wonder as to whether it is your choice or if you have troubles holding a steady job.

If you are thinking about changing jobs prior to buying a home (unless you are moving for a new position which is a different scenario), consider staying put until you are in your new home. A probation period at a new job is something else that can derail your application.

CAPITAL

Capital refers to your down payment. Have you saved diligently? Are you using gifted funds? As a first-time homebuyer will you be pulling money from your RRSPs?

In theory, the more you put down toward your purchase the less risk there is to the lender.

Demonstrating that you have saved your down payment over time speaks to your character as well. This is something that lenders like to see. If an application is a little weak in one area, but you have a significant down payment, this can sometimes mean the difference between an approval and a decline.

COLLATERAL

Collateral refers to the home you are buying. Lenders want to make sure they are financing a house that is in average or better condition.

When you speak to your mortgage broker or banker and get a pre-approval in place, it is important to know that this approval is still subject to the lender approving the property you choose. Micro condos or homes can also be challenging.

Former grow-ops or homes that are torn apart are incredibly difficult to finance. Some lenders will only consider certain communities or have restrictions on the types of properties they will look at.

When working on your pre-approval, make sure you discuss the type of home you are looking for so your finance person can choose the right type of lender for you.

CONDITIONS

Conditions refer to the terms of the mortgage itself. As an example, if your credit history has a few bumps, you may not qualify for a mortgage with an A lender, but with enough down payment, you will qualify with a B lender.

If your credit score falls between 580 and 680, there are lenders who will still approve you for a mortgage, but at a slightly lower amount.

The size of your down payment also affects your mortgage conditions. If you have less than 20 per cent down, your mortgage will be insured and will need to be amortized over 25 years or less. If you have more than 20 per cent down, several lenders offer 30 or 35 year amortizations.

PREPARATION

If you are starting to think about buying a home, I suggest you reach out to a mortgage professional for a review of your personal situation. You may be close to being ready, and preparation may mean organizing your documents and getting a preapproval in place.

Preparation may mean you need a little time before you are ready to buy. This can mean developing a plan to get you where you need to be. If there are issues with your credit history, you will need time to rebuild your credit. You may need to save your down payment.

Don’t be afraid to ask questions – it’s important to understand how all these pieces fit together.

Buying a home is the biggest financial commitment most people make, and it’s important that you go into the process well prepared.



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Creating your dream home

Having troubles finding your dream home? Are the houses in your price range looking a little dated?

If you find a home in your preferred neighbourhood that has the features you want, but needs a little updating, you may want to think about a Purchase Plus Improvements mortgage.

This option is designed for people who wish to purchase a home that may require some immediate upgrades:

  • updated electrical service
  • sewer hookup
  • a new roof
  • central air
  • a new furnace
  • new siding
  • eaves
  • soffits
  • fascia
  • doors
  • windows
  • a new kitchen
  • carpeting
  • or any other renovation that would increase the value of the home. 

It is important to know that this program covers permanent updates to the home, but cannot be used for moveable assets such as appliances. This can be a great solution if you find a house you love but realize that it will take some time to save for any renovations that you want to do.

Here’s how it works. Let’s assume that you have a five per cent down payment. Before the mortgage financing is finalized, you will collect written quotes for the repairs or improvements to be done.

When the application for financing is submitted, the request is made for 95 per cent of the purchase price plus 95 per cent of the cost to complete the improvements.

It is important to know that the lender will hold-back the improvement portion of the mortgage until the work has been completed and inspected, normally within 30-60 days of closing.

Once the work has been completed, the lender will advance the balance of the funds and the contractor can be paid.

This means that you will need to find a way to cover the cost of the renovations temporarily, or work with a contractor who is willing to be paid at the end of the project. Some clients use a credit line to cover the costs until the mortgage funds are released.

What does this mean? Let me give you an example, with the client putting five per cent down:

Purchase price:                $400,000 X 95% = $380,000

Cost of improvements:     $40,000 X 95% = $38,000

Total mortgage:                $440,000 X 95% = $418,000

An application is made for a mortgage in the amount of $418,000, which represents 95 per cent of the purchase price plus 95 per cent of the improvements.

On the closing date, the mortgage advanced to complete the purchase is $380,000 plus the original five per cent from the purchaser’s down payment ($20,000), which provides sufficient funds to complete the purchase of $400,000.

The seller is paid in full and the house is transferred in to the name of the purchaser.

After closing, the contractor completes the improvements (normally within 30-60 days after the closing) and the lender advances the hold-back of $38,000.The purchaser pays the additional five per cent of the cost of the improvements ($2,000) and the $40,000 owed to the contractor can be paid.  

Last summer, I worked with clients who bought a rural property. When the septic inspection was done, they were told that the system was on its last legs.They made the decision to use a Purchase Plus Improvements mortgage and replaced the system before they ran into difficulties.

I’ve also work with clients who used the program for cosmetic upgrades.They renovated their kitchen and bathrooms and changed out all of the flooring.They essentially moved in to a brand new home in the area they wanted to live.

The appraisal at the end of their project showed an increase in value of almost $75,000 based on $35,000 worth of improvements they had done.

With this program, purchasers are happy because they have done extensive improvements to their homes with a minimal cash outlay (the balance was financed with their mortgage).

In both cases they get to enjoy an updated home without scrimping and saving to come up with the funds for improvements.



More The Mortgage Gal articles

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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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