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The-Mortgage-Gal

Mortgage papers you'll need

Headline: Having your ducks in a row reduces mortgage approval related stress by 85 per cent

Maybe not actually a headline, and the statistic is decidedly subjective.

However, after a few conversations with clients over the last few weeks, I thought mortgage documentation might be worth explaining.

I’m going to qualify the information that follows by saying that what follows is based on my experience and process for working with clients. Each banker or broker works a little differently.

In my early days as a broker, I would take my clients’ information and complete their application. I took at face value the information they provided.

When they wrote an offer to purchase a home, I would send their application in for approval. Based on the conditions that came back from the lender (with an approval), I would have my clients start to gather documents to support the information they gave me originally.

I experienced a few uncomfortable situations. For instance, with one file where the parents were signing on the mortgage, I asked if they had a mortgage on their home.

They said no.

A week before closing, much to my horror, I learned that while they did not have a traditional mortgage, they did have a large line of credit with the house registered as security. I had to add in a payment of almost $3,000, which almost collapsed the financing.

From this situation, I learned the importance of fine-tuning my questions during our initial interview. I also incorporated the practice of pulling title searches so I knew exactly what I was working with.

Working on another file some time later, the client told me he made $80,000 a year. Beautiful, I thought. The application should sail through.

When his employment confirmation arrived, I learned was that he had actually made $60,000 the previous year. He thought he would be working lots of overtime so told me the figure he thought he was going to make.

While great learning opportunities, these are situations I never want to repeat.

My process now looks very different.

During my initial conversation with my clients, I ask very specific questions. Based on their particular circumstances, I send out a detailed list of the documentation I require to have their application approved.

The list looks slightly different depending on whether they are T4 employees, self-employed, or pensioners. The list also changes if they are doing a refinance as compared to buying a new home.

I also make sure I let them know that despite gathering most of their information up front, each specific lender has slightly different requirements, so we might need to collect more paperwork down the road.

My list can seem daunting, but what I have found is that I am able to be far more accurate in terms of pre-qualifying clients to go home shopping. I’ve also found that having all of their paperwork up front (or at least being collected) helps to minimize last minute stress and surprises.

If you are getting ready to buy a home, there are several key documents I suggest you start to organize.

First, lenders will be looking for confirmation of your employment history and earnings.

Make sure your income tax returns are filed up to date, and any balances owing to Canada Revenue Agency are paid. Keep your tax returns, T4s, and receipts together. Generally you will need to document a two-year history.

When you have an accepted offer to purchase a home (or if you are moving forward with a refinance or switch), you will be asked to provide a verification letter from your employer along with a current pay stub.

Next, lenders will need to know where your down payment is coming from. They will ask for a three-month history of your savings account (or RRSPs, investments, etc). They will question any large deposits, so you will need to have documentation to show where they have come from.

If your down payment is coming from the sale of your current home, you will be asked to provide a current mortgage statement and a firm offer for sale on the home.

If you are refinancing your home or switching your mortgage to another institution, the new lender will request a current mortgage statement so they are able to have accurate numbers to work with.

You will need to provide a copy of your city property tax notice and a copy of your home insurance policy.

If you have had issues with credit in the past, it is critical that you keep receipts and statements showing you’ve paid any outstanding debts or collections.

For clients who disclose up front that they have had challenges with credit in the past, I ask them to pull their own credit bureaus so I can have a look at what we are working with.

I worked with a couple recently where the wife had an outstanding collection on her credit report. She had paid it in full over five years previously. She had all of the documentation to prove that it was paid, including a letter from the creditor.

We were able to send the information to Equifax and have her report corrected, which made all the difference in the amount they then qualified to borrow.

Although it may seem a little daunting, by organizing all your paper work ahead of time your broker or banker will be able to deal with any issues up front and more importantly you will be able to focus on all of the other decisions that need to be made once your offer is accepted.



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Flex down mortgages

"How are we expected to save a down payment when the rent we pay is higher than our mortgage payment would be?”

Over the last two weeks, several clients have asked if there is any way to get a mortgage if they don’t have a down payment.

There are a few options available.

The first potential source of down payment I explore with purchasers is a gift from family.

Gifts need to come from first-degree relatives, which means ideally a parent, sibling, or grandparent. I have had a few files approved when the family member giving the funds was an aunt or uncle, but these are done on an exception basis.

When a family member gives you funds for your down payment, the gift needs to be non-repayable. The person giving the gift and the person receiving the gift both sign a letter confirming that the money is a legitimate gift.

Not everyone has family in the position to give money to help with a down payment.

Many lenders offer a flex-down mortgage product.

Flex-down mortgages are insured by either CMHC or Genworth, and essentially allow purchasers to borrow from other credit facilities for their down payment.

Flex-down products allow buyers to use non-traditional funds for their down payments. Non-traditional sources of down payment (as defined by CMHC) may include:

  • any source that is arm’s length to and not tied to the purchase or sale of the property such as borrowed funds
  • gifts
  • 100 per cent sweat equity
  • lender cash back incentives.

While there are still a few available, most lenders have moved away from cash-back incentives.

Purchasers using borrowed funds need to qualify to cover their proposed mortgage payment as well as any payments related to the borrowed down payment, in addition to any other payments they already make.

Flex-down mortgages are not the right fit for everyone. If your credit is maxed out or you’ve had credit issues in the past, lenders will not be keen to approve a flex-down mortgage.

If, however, you have a history of managing your credit responsibly and make a healthy income, lenders are far more likely to approve a flex-down mortgage for you.

The CMHC and Genworth programs are very similar. Key points to know are that the minimum recommended credit score they are looking for is 680. Minimum down payment is five per cent.

One and two unit properties (ie: a house with a suite) are eligible under this product, and normal mortgage guidelines apply.

Mortgages under this program are subject to a maximum purchase price of $1 million and a maximum amortization of 25 years. They can be used for a purchase (one-time advance) as well as for a Purchase Plus Improvements (adding funds up front for renovations).

An important point to note is that the insurance premium is slightly higher. For a flex-down mortgage with five per cent down, the premium is calculated at 4.5 per cent as compared to four per cent for a mortgage with a traditional down payment.

As an example, for a purchase price of $500,000, the premium would be $2,375 higher.

Also important to note is that lenders are very particular when approving flex-down files. As you are essentially financing 100 per cent of your home, they want to make sure you are solid.

Employment stability and a credit history that demonstrates responsible management of your finances are essential.

Who might this program be a great fit for?

If you are self-employed and report significant income on your tax return but keep most of your money invested in your business, this might be a great option to help buy a home sooner rather than later.

If you are newly graduated from university and have established credit and great income but have put all of your money into paying for your education, this might be the right fit.

If you think that flex down might work for you, call us at 250-826-5857. We’re happy to discuss your particular situation to see if Flex Down is the right fit.

Don’t forget, property taxes are due July 3.

If your lender pays taxes on your behalf and you haven’t already done so, go online and claim your Home Owner's Grant.

It takes less than five minutes and saves standing in a long line at City Hall!



An ah-ha moment

I’ve had two conversations with friends during the last week about what exactly a mortgage brokers does.

Because I am a mortgage broker and immersed in the industry, I assumed  everyone understood the difference between mortgage brokers and bank employees.

I had an “ah-ha” moment this week.

Over the weekend a friend said, “I don’t understand why someone would use a mortgage broker. We’ve always just gone to our bank.”

This friend has squeaky clean credit, two strong incomes in the household, and a significant amount of equity in her home. She would be able to approach any lender and have a mortgage approved.

I stumbled a little bit with my answer. I talked about how brokers have access to many different lenders, and how brokers most often have flexible schedules.

What I missed was:

  • the personalized service brokers offer.
  • brokers specialize and are experts in their field.
  • we work for our clients, not any specific lender.

I started my career with one of the chartered banks. I benefitted from fantastic training opportunities. I realize now that being a broker is truly a luxury. I am able to focus on one product line and seek suitable options for my clients.

What exactly do mortgage brokers do?

Mortgage brokers can be either independent or work for one specific financial institution. Independent brokers have access to multiple lenders including chartered banks, credit unions, mono-line mortgage companies, and private lenders.

Each of these types of mortgage lenders has slightly different policies and lending criteria and offers different rates accordingly. For instance, chartered banks tend to be more conservative and extend credit to clients with very clean credit and a strong employment history.

Private lenders, at the other end of the spectrum, will consider clients with bruised credit or more erratic income, provided they have a significant amount of equity.

A mortgage broker will meet with you and assess your situation. Your broker will then explore options to find the best fit for you, evaluating considerations such as your credit and employment history, down payment available, and your income. 

After spending some time getting to know a bit about you, your long-term goals, and what type of property you are hoping to purchase, they will offer recommendations and suggestions to help point you in the right direction.

The beauty of working with independent brokers is that they complete your application and pull your credit bureau once, then shop different lenders on your behalf.

This is a significant advantage as you might spend hours going from appointment to appointment trying to do this on your own. 

If your situation is unique (i.e.: you are new to Canada, have less than perfect credit, you are self-employed), a broker will be knowledgeable about specialty programs offered by different lenders. In cases like this, they will be able to explore different financing options for you.

Once you have written an offer on a house and have been approved for a mortgage, your mortgage broker will connect with you to collect documents and signatures required by your lender.

They will work with you until your paperwork goes to your lawyer (or notary) and be available to answer questions as you move through the process.

So what does this mean for clients?

One of my clients recommended me to a co-worker who is shopping for her first home. My client raved about the service mortgage brokers provide, and as they chatted she came to realize that her co-worker had no idea what mortgage brokers do. 

When my client relayed this story to me, I recognized that a lot of the service brokers provide happens behind the scenes.

This led to an interesting conversation between my client and I. Granted, she is one of my biggest cheerleaders –  but she went on to tell me how she told her co-worker about why she feels working with a mortgage broker is the only way to go.

From her perspective, here are some of the benefits of working with a mortgage broker:

  • RELATIONSHIP – I took the time to get to know her as a person and learn about what was important to her.
  • PERSONALIZED SERVICE – Brokers are not bound by a 9-5 schedule, so we were able to work around our clients’ schedules.
  • COMMUNICATION –  I kept her updated as we moved forward with her application. Frequent updates helped reduce her anxiety.
  • OPTIONS –  Her bank was not able to finance the type of property she chose. With access to more than 50 lenders, each of which has slightly different policies, I was able to research these options to find the best fit for her unique property.
  • EDUCATION AND ADVICE –  I spent time with her to make sure she understood the process and her options. I connected her with other professionals that I have worked with in the past. What she found most valuable was that I provided a breakdown of closing costs after our first meeting. She said that in four previous home purchases no one had done that for her.

I’ve told people many times that the beauty of being a mortgage broker is that we concentrate on one product line – mortgages. Each client we work with is unique, and each lender we work with is different.

As brokers, we learn something new every day and make a point of keeping up to date with legislative changes and new products as they are introduced.  

A key take-away here is that mortgage brokers are specialists – they focus solely on helping their clients find mortgage financing.

Turnaround time for a straight-forward mortgage application in the broker world can be as little as a few hours and is more typically between 24 and 48 hours.

Most clients we work with say that waiting for an answer about their financing is the most stressful part of the process, so such a quick turnaround time is one of the most significant benefits of working with a mortgage broker.

As a rule (unless your broker has to seek out a private lender), the personalized service provided by a mortgage broker comes at no cost to you. Mortgage brokers work on a commission basis, and this commission is paid by the lender after your mortgage is finalized.

This does not affect your interest rate in any way, and you will likely find that mortgage brokers are highly motivated to help you find a mortgage because if they don’t, they don’t get paid.

Whether you are looking to buy a home or refinance your existing mortgage, a mortgage broker can help you navigate your way through the new mortgage rules.



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Mortgaging through divorce

Divorce sucks.

This week I met with five clients who are separating. This was unusual for me; it’s been a while since I’ve worked with clients who are going their separate ways.

Each situation was slightly different, but for three of the five couples, financial issues were what pushed them to the point of separation.

Stressing day after day about outstanding bills or not having funds available to manage the necessities of life is not a fun way to live. Even the strongest couples have a tough time surviving financial duress.

Whether you are trying to salvage your relationship or are past that point, it is important to know that you have options. Some of these options involve dramatic lifestyle changes, while others can be fairly simple changes.

If you are trying to straighten out your finances, here are a few ideas to consider:

  • Have a heart-to-heart with your spouse and go over all of your bills so you are both on the same page as to how serious things are. Brainstorm together to think about options.
  • Draw up a budget detailing your fixed monthly costs. Compare your bank statement to the budget to see if there are any changes you can make to free up monthly cashflow (can you cancel your home phone? Drop to a lower package for TV and internet?). It can be staggering to total up how much we spend on items like drive-thru coffee or takeout meals.
  • Approach your bank for a consolidation loan. Do you have family that might be open to helping?
  • Prepare a list of your assets and see if there is anything you might be able to sell. Things can be replaced at a later date – your sanity not so much. Could you potentially survive with one vehicle instead of two? Do you have toys in the yard that you don’t use all that often (ie: quad, snowmobile, boat)?
  • Do you have RRSPs, investments, or a life insurance policy with a cash value that can be redeemed? Withdrawing from your RRSP could potentially create a tax debt the following year, so think carefully before taking this step.
  • Consider refinancing your home to pay off consumer debt and reduce your overall monthly payments. This will only be an option if you have a significant amount of equity in your home. The maximum mortgage lenders can consider is 80 per cent of the value of your home. If your home is worth $500,000, the maximum mortgage available would be $400,000 (subject to income and credit qualification). In this example, if your current mortgage balance is $350,000 you could potentially access $50,000 to pay off other debt.
  • Think about taking on a second job or looking for a position that pays more.
  • Talk to your creditors to see if there is any way to reduce monthly payments due.
  • Sell your home and look for a more economical place to live. In our market, this isn’t as straightforward as it sounds, but being able to pay off your bills might be worth the upheaval.
  • Approach a credit counselling agency. Sometimes having a frank conversation with a third party might help you identify solutions. There are programs such as consumer proposals or bankruptcy where the credit agency will negotiate with your lenders to reduce the amount due and come up with a more manageable payment schedule. These are options of last resort as they will affect your credit rating for the next seven (or more) years, depending on how long it takes you to fulfill your obligations.

If you are past the point of salvaging the relationship and are at the point of dividing your assets (and bills), hopefully you are able to work collaboratively to sort things out.

If one spouse is looking to buy the other out of the marital home, the 80 per cent rule with respect to refinancing does not necessarily apply. Although the program is not published online, Canada Mortgage and Housing Corporation will insure mortgages up to 95 per cent of the home’s value when there is a marital breakdown involved.

Using the example of the same home valued at $500,000, the spouse taking over the home would be eligible (again, based on income and credit qualification) to mortgage up to $475,000 to pay out the spouse that is moving out.

There are a few intricacies to be aware of. A spousal buyout is essentially treated as a purchase of the home, so most lenders require a purchase agreement in addition to a separation agreement.

You will need a separation agreement which spells out the division of assets and identifies any support to be paid (or received, whichever end you are on). If there are no children involved and no spousal support payable, some lenders will accept a Statutory Declaration stating this in lieu of a separation agreement, but this is decided on a case by case basis.

In this situation, the new mortgage can be used to pull equity to pay out the ex-spouse’s interest in the home but not to pay off joint debts. It is important to keep this in mind when you prepare your separation agreement.

Reach out for help before things get too bad. It is heartbreaking to see couples torn apart, regardless of the reason.

Most importantly, find a financial professional that you are comfortable working with to help you through the process. Judgement is the last thing you need.

Sometimes that extra set of eyes reviewing your overall financial picture might help you identify a solution to get you back on the right track. If you find yourself in this position, I am willing to help you look for alternatives.



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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