Mortgage stress

In previous columns, I’ve shared my thoughts on how best to organize yourself to apply for a mortgage pre-approval.

I’ve also talked about different types of mortgages and shared some tips to help you pay your mortgage off sooner.

What I haven’t talked about is the dirty little secret of the mortgage process – the stressful time between writing your offer and finding out that your application is unconditionally approved.

When working with clients, my process looks like this (give or take, depending on the situation):

Initial conversation to determine what you are looking for:

  • Application – often done on the same call, takes anywhere from fifteen minutes to an hour, depending on how many questions you have
  • Background work – review your credit bureau, collect documents, confirm information matches your application

Once I’m confident that you are ready to go shopping (or refinance, whichever the case is), we have a second conversation about where we go from here.

Now the exciting part! You head out with your realtor and look at homes in your price range.

Here is where the stress starts. You find a home that you love (or checks all the boxes on your list once its renovated). You ask your realtor to write an offer.

There will most likely be some back and forth between both parties (you as the buyer, and the sellers, both represented by your realtors). The next day or two may be very emotional as you negotiate back and forth to come to agreement on terms like the price and closing date.

Your offer may not be accepted for several reasons. Maybe there are competing offers, or maybe the sellers are not willing to accept the price you are willing to pay. In this case you are back to the drawing board looking for another home.

Once you do have an accepted offer, the process kicks into high gear until your unconditional approval is in place. I’ll explain what that means in a minute.

Your realtor puts together a package that includes your accepted offer, a current title search of the home you are buying, a Property Disclosure Statement, and the realtor version of the MLS listing for the home.

With this package, I finalize your mortgage application and submit it to a potential lender.

The accepted offer will have conditions written in the contract to protect both buyer and seller. Common conditions include:

  • That you are able to find suitable financing
  • Subject to a satisfactory home inspection
  • Subject to your review of a Property Disclosure Statement (completed by the seller, outlines any potential issues with the home)
  • Confirmation that you are able to purchase home insurance for the property
  • Review of the title search to make sure you are aware of any easements
  • Sale of your current home if applicable

Depending on the situation, there may be other conditions. For instance, if you are buying the home as your primary residence and there is currently a tenant, lenders require the home be vacant when you take possession. In this case they will ask for a copy of the notice given to the tenant requiring them to move.

If the offer was written subject to the sale of your home, it will most likely contain a time clause requiring you to finalize your offer within forty-eight hours if a back-up offer is made by another purchaser.

There is usually a time period built in for you to sell your home first (ie: a month), but if it hasn’t sold within the month the sellers can potentially accept a back-up offer.

From conversations with clients, this is the time they feel the most stress during the process. Waiting for an approval from a lender feels like it takes forever, and doubts about whether they will be approved run wild.

In reality the lenders I work with generally have a commitment in place within twenty-four hours. My favorite lender has a turnaround time of under four hours.

When the lender issues a commitment, it is essentially an approval in principal. The commitment is issued with its own set of conditions. Once those conditions are signed off by the lender you are in the position to sign off the financing subject of your offer.

Conditions on a mortgage commitment generally include:

  • Confirmation of your income
  • Confirmation of your down payment
  • Confirmation of other details that affect your application (ie: if you own another property they will ask for confirmation of the mortgage, property taxes, and rental income if applicable)
  • Confirmation other debts have been paid, if required

If you are a T4 employee with a great credit history that has been diligently saving your down payment this step is usually pretty smooth.

Your documentation is submitted to the lender. The lender will do a verbal confirmation of your employment. If your documents match your application, the financing conditions (again, depending on the lender’s processes) can often be signed off within twenty-four hours.

If your application is more complex, satisfying the lender’s conditions may take days of back and forth and additional documents from you.

More complex may mean if you are self-employed, if you have multiple properties, or if you have a bruised credit history. If the property you are buying has issues, this may also require additional paperwork (ie: a strata unit with major repairs needed for the building).

After I have confirmation from the lender that all of their conditions are satisfied, you are able to remove your financing condition. Unless something unusual is found during the home inspection, this is the point that most people take a deep breath.

Once you have your final approval and have signed off all the conditions on your offer, the hard work is done. About a week before you take possession of your new home, you will need to take your down payment funds to your lawyer and sign final documents and make sure you have home insurance in place.

Whether working with a mortgage broker or your bank, regular communication and updates will help reduce your stress through the process. Working with someone who is thorough upfront will set you up for success and help speed up the approval process.

And … if you are already a homeowner in any of the areas affected by the Speculation Tax, make sure that you complete your declaration. March 31 is rapidly approaching!

Get mortgage pre-approved

I had planned to do a deep dive into the speculation tax, but after a phone call with one of my favourite realtors, I felt it was time to talk about the importance of having a pre-approval before going house shopping.

The realtor asked if there was anything I could do for her client. She gave me an overview of the client’s situation (no names, just a few key points). The client had written an offer on a home almost a month ago.

His bank had been working on the file for three weeks and finally came back with a decline as they couldn’t make the numbers work. He went to a credit union that also came back unable to help the client.

At this point, there is a back-up offer in place, so if the client isn’t able to find financing over the next week, he will lose out on the property.

From the client’s perspective this is unfortunate. The new home has a detached double garage and is on five acres, so is a perfect fit for this man’s hobbies and interests. It is also in an area where homes rarely come up at this price.

From the seller’s and realtors’ perspectives, this is frustrating as they have lost a month of time and effort where they could have already had the home sold.

Issues with financing can pop up, even when you take the time to get a pre-approval in place:

  • lenders may not like a specific property
  • your credit score may drop
  • you might write an offer on a type of property you had not discussed with your mortgage professional (i.e.: a mobile home, a strata property where the strata payment puts the debt servicing numbers too high, an age restricted complex, etc.).

However, the odds of having your financing approved (in many cases) certainly increase if you’ve taken the time to get your ducks in a row before heading out shopping.

After 10 minutes on the phone, I told the realtor that the only solution I could see was potentially adding a strong co-signer and increasing the down payment. She wasn’t sure whether this was an option for her client.

As a mortgage broker, another challenge that I sometimes face is being able to support and document what my clients have told me while completing their application. Because of this, I am very particular about seeing my clients’ documents upfront.

As an example, I recently took an application from a client who told me his annual base salary was $62,000. When I received his employment verification letter, it stated that his annual salary was $47,000 plus tips.

When I asked the client if he declared tips on his tax return, he said no.

This is a problem because we are required to document and verify income that supports the mortgage application. Lenders don’t want to go down the road of foreclosure. They want to know that you are going to make your mortgage payments.

I’ve also run into a situation where a client went out and wrote an offer without talking to his bank ahead of time. Everything was moving forward and looking positive until the lender pulled a Transunion credit report and discovered a loan that the client had co-signed for a friend.

The client hadn’t disclosed the loan to his banker as he never had to make any of the payments.

He didn’t think it was an issue.

It was an issue.

In this case, the client had already sold his current home and ended up having to work with a B lender and pay a higher interest rate to buy the new home. Frustrating but avoidable.

With mortgage applications, the three most important considerations are:

  • your employment / ability to repay the mortgage
  • your down payment
  • your credit history

Even if you have purchased a home in the past, it is important to touch base with a mortgage professional before you make any big decisions.

Changes to mortgage legislation over the last two years have dramatically affected your borrowing power. Lenders have become increasingly more particular about the documentation they need.

To learn more about the pre-approval process, check out https://www.okanaganmortgages.com/mortgage-pre-approval-know-what-you-can-afford/

Having a pre-approval is not a guarantee that your financing will be approved. Working with a knowledgeable mortgage professional that takes the time to educate and prepare you for the home buying process can save disappointment down the road.

Buying rental properties

Over the last few weeks I’ve worked with several clients who are building their portfolio of rental properties.

Three of the mortgage applications went smoothly, while the other two were a little more challenging.

Each lender has slightly different policies and procedures for evaluating mortgage applications. An important starting point is:

  • the client’s overall financial situation
  • income
  • credit score.

Credit score can make or break an otherwise strong application.

When we get into applications with multiple rental properties, most lenders use a rental worksheet to determine how well an application debt services.

Very simply, debt service refers to the amount of money required over a period of time to repay debts. For rental properties, this calculation includes:

  • mortgage payments
  • property tax
  • allowance for vacancy
  • allowances for insurance and maintenance.

Some lenders use a simpler calculation. They factor in the full mortgage payment and allow a percentage of the rental income (often 50 per cent) but don’t factor in the additional allowances like vacancy, insurance, and maintenance.

One mortgage product that some investors use to purchase rental properties is a hybrid mortgage featuring both an amortizing portion (paying off steadily over time) and a credit line component.

Let’s say you have $250,000 for your down payment on a $500,000 rental property.

To purchase a rental property you need a minimum of 20 per cent down (in this case $100,000). In this example, you could choose a mortgage of $250,000 and add a credit line of $150,000.

The intent behind adding the credit line would be to have easy access to your equity in case you wanted to buy another property.

In the past this has worked well for investors.

Over the last few months, I’ve seen a number of lenders adding in a payment for the credit line as well. They are using a payment, calculated over 25 years at the Bank of Canada Benchmark rate (currently 5.34 per cent), based on the approved limit as opposed to what is actually outstanding.

The intent is to prevent clients from becoming over-extended and unable to meet their financial obligations. The lower your total mortgage exposure, the stronger your application.

The other thing I am seeing is lenders becoming more cautious when approving mortgages for clients with multiple rental properties. Depending on the client’s financial position, the tipping point seems to be about four rentals.

There are some lenders who are not concerned with how many rentals a client has, while others set a cap (often four properties). In some cases, after four properties it makes sense to then find commercial financing.

Commercial lending is a different option all together.

While still considering the overall strength of the application, on the commercial side there is a stronger focus on the property being purchased.

Commercial applications are handled a bit differently. I am seeing more investors move to the commercial side as residential lenders tighten their guidelines.

This information only hits a few of the important points of financing rental properties. Each client and each purchase is different, so it is really important to connect with your mortgage broker or banker before you write an offer to purchase.

What might have been a slam-dunk for you two years ago before the mortgage rules changed might be impossible to finance now. Having your mortgage professional run the figures before moving forward can save a lot of stress once an offer is in play.

Exemptions from Spec Tax

The Speculation and Vacancy Tax is front and centre again.

The prominent theme has been around the importance of completing the declaration to exempt yourself from the tax (if applicable).

I’ve also had calls from several people about the assessed values on their second homes.

The information I am relying on comes from the Government of B.C.’s website.

If you owned a home in one of the areas subject to the speculation tax as of Dec.31, 2018, you must complete and submit a form to claim your exemption no later than March 31, or the province will bill you for the spec tax.

People who own residential property within designated taxable regions of B.C. may be eligible for an exemption from the speculation and vacancy tax. 

The speculation and vacancy tax is designed to prevent housing speculation, turn empty homes into good housing for British Columbians, and raise revenue that will go to supporting affordable housing.

Exemptions are available, ensuring that more than 99 per cent of British Columbians are exempt.

If you are not exempt from paying the spec tax, it is important to know that any amounts owing are due and payable July 2. If you do not complete the exemption declaration, you will be billed for the tax.

The province will have a process for correcting this if you are billed for the tax, but should be exempt. Speculation (pun intended) on my part is that for this first year, it will take a while to get errors sorted out in July, so taking the time to fill out the exemption declaration may save you a fair amount of pain and aggravation down the road.

While researching available information, I couldn’t find if the spec tax will be collected with your regular property taxes. My thinking is that when you get your property tax notice in May/June, that it will include the spec tax amount.

The website goes into great detail about all of the exemptions available. It is important to know that if you co-own a property in one of the affected areas each owner fills out a separate declaration.

From the provincial site, here is a breakdown of the exemptions available for individuals:

  • Principal residence exemptions
  • Occupied by a tenant
  • Can’t live in the residence because it’s uninhabitable
  • Secondary residence close to medical treatment facility
  • Just bought or inherited the property
  • Separation or divorce
  • Bankruptcy
  • Recent death of owner
  • Property is in a trust created by a will for a minor
  • Property has rental restrictions
  • Property is a strata hotel
  • Property includes a licensed child daycare
  • No residence on the property
  • Other exclusions from the tax

One concern I have is that people who have their property taxes paid by their mortgage lender may be caught unawares.  Ideally people are opening and responding to incoming mail, but not everyone does.

If you don’t complete the declaration form, you might be in for a nasty surprise in August or September when your lender adjusts the property tax portion of your mortgage payment.

In a nutshell, lenders communicate with the local government office to determine how much you owe for your property taxes each year. At the beginning of July, your lender transfers funds to the city to pay your property taxes.

Your lender will compare how much they paid to the city against how much they collected from you over the year.

They will adjust the tax portion of your mortgage payment; if they didn’t collect enough the previous year your payment will increase a little. If they over-collected your payment will decrease accordingly.

If you do not claim your exemption for the spec tax, you could potentially see your mortgage payment increase by several hundred dollars to account for the new tax. You might not realize this, or you may find out the hard way if you don’t have sufficient money in your account to cover the increased payment.

For people that will not be exempt from the tax, it is important to take a look at your BC Assessment to see if it represents the accurate value of your property. Over the last two years (in Kelowna) many of the  assessed values have been a pretty accurate representation of market value.

This week, I saw an assessment on a condo that had jumped to $424,000. The assessment last year was $339,000. The owners of the unit are residents of another country and will be subject to the spec tax.

We looked at the Sample Sold Properties section on Evalue for their condo, and the highest price for a similar unit in the same complex sold last year was $364,000.

The Sample Sold Properties tab is just above the map, about 2/3 of the way down the page, when you search your property address on the Evalue link. BC Assessment does a great job of posting recent sales.

These clients will be hiring an appraiser and appealing their assessed value.

We are learning about the spec tax as information is released. Key takeaways:

  • If you are exempt from the tax, it is crucial that you take a few minutes to complete the declaration to save yourself frustration down the road.
  • If you are subject to the tax, take a minute to review your assessment to confirm the value is consistent with current market values for your property.

It will be interesting to see how the spec tax affects our housing market and our economy.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order 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 their blog at https://www.okanaganmortgages.com/blog


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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