Timing your mortgage

After a bit of a slow start to the year, the spring market is in full swing. For many clients, it’s a bit of a
chicken-and-egg game:

  • Do I list my current home for sale first?
  • Do I write an offer on a home I want to buy, then list my home?
  • When is the best time to move? And how do I move out of one home and into the new one, all in one day?

It all depends.

Working with a knowledgeable realtor and mortgage broker is key to maintaining your sanity.

In a previous column, I talked about porting your mortgage from one home to another. Did you know that in many cases, you can complete the purchase of your new home a few days before the sale completes on your current home?

This is known as bridging your mortgage.

I will talk about bridging a little later.

With respect to the timing question, the answer will vary based on the reason that you are moving. If you have transferred for work in another community and are relocating, you will likely list your current home before you venture out house hunting in your new community.

There are considerations that may affect this. If you have children in school and they are close to the end of the school year, you may want to hold off on selling your home for a short time if the whole family is not moving together.

If you are close to the beginning of a new school year, you will more likely want to find a home and relocate your family as quickly as possible.

If an offer does come in on your home, you can try to negotiate with the buyers to find a date that works for your family.

Maybe your dream home came up for sale unexpectedly. Maybe you have decided to upsize or downsize your home. Maybe you have found yourself in the position of needing something more accessible because of changes in your health.

In an ideal world, the stars align and your current home sells quickly. Reality doesn’t always play out that way.

Sometimes, your home takes a while to sell. Sometimes your home sells a lot quicker than you anticipate.

So what if you’ve found a new home you love? Sellers are generally more interested in offers that are not subject to the sale of another house.

If you write an offer on a home and it is subject to the sale of your current home, most realtors will include a time clause (generally a 48-hour time frame).

A time clause means that if another suitable offer comes in on the home, the sellers will give you notice that you have 48 hours to make your offer firm and binding, or the second offer bumps yours.

On the flip side, what if you are looking to make a change, but have not found a new home yet and you get an offer on your home?

I have seen some offers where the sellers include a clause that gives them a time frame to find a new home. Generally this lines up with the time frame allowed for the purchasers to remove their subjects.

So where does bridge financing (bridging) enter into the conversation?

Once you have a firm sale on your home, many lenders have programs that allow you to arrange bridge financing so that you can purchase your new home before your original home sells.

Different lenders have different programs and criteria. As an example, let’s say you’ve accepted an offer on your home that closes on June 30. The purchasers have removed all their conditions, so you have a firm and binding sale.

You found an amazing home, but would really like a couple of weeks in the new house to do some painting and renovate the bathroom before you actually move in.

Based on the firm sale of your house, your lender will likely be able to offer bridge financing so you can complete the sale on the new property a couple of weeks before your sale is finalized.

The lender essentially advances the money you need for your down payment and finalizes your new mortgage. Your lawyer will draw up all of the documentation.

Most lenders offer bridge financing for a nominal administration fee ($250-$350) and charge daily interest on the money you need for your down payment.

In some cases you need to pay out additional bills (credit cards or loans) for the new mortgage to work. Some lenders will also arrange for this as part of the bridge financing.

Bridge financing can also be a great option if you have a lot to move and a small moving crew. Bridging to own the new house a few days ahead of time will allow you time to move and thoroughly clean the house you’ve just sold without dropping from exhaustion because you’ve packed this all into a day.

We’ve bounced around a bit here, but the key takeaway is that every client is unique. If you are trying to sort out the timing of your move. working with experienced professionals can help you identify ways to accomplish a smooth move.


Interest rate war

If you are thinking of buying a home this spring, great news.

Over the last two weeks, many lenders have dropped their rates multiple times.

One family I have been working with made an offer on a home at the beginning of March and closed on Friday. When we submitted their application for approval, the best rate (for their situation) I could find was 3.49 per cent.

By the time their mortgage closed, their rate was down to 3.19 per cent.

While this may not sound like a big deal, on a mortgage of $650,000 the interest savings for this family over the five-year term will be approximately $9,200.

Rate is only one piece of the mortgage puzzle, and I tell my clients upfront that I don’t choose lenders based on rate alone. Client experience is a very important factor in my decision to place a client with specific lenders.

In February, a young lady I’m working with wrote an offer on a home with a closing date that is a few months away. The house was a rental and the tenants had to be given notice.

The house needs some updates so we have a Purchase Plus Improvements mortgage lined up so she can renovate the bathrooms and replace the roof and furnace.

After we had her approval in place, she called and asked about an interest rate she had seen online.

The rate was slightly lower than the approval I had in place for her. I did some investigation (called the company advertising the rate) and learned a bit more about their offer.

The mortgage was a no-frills product and did not offer a Purchase Plus Improvements option, so was definitely not the right fit for her.

I generally try to steer clients away from the no-frills mortgages as initial cost savings may mean major stress down the road.

As an example, some lenders offer both a regular mortgage and a low interest option. The low interest option tends to be .05 per cent lower.

The differences between lenders’ regular pricing and low interest option can include higher prepayment penalties or restrictive exit terms.

By exit terms, I mean that some lenders will not allow you to break your mortgage before the term is up unless there is a bona fide sale of the property.

When buying a home, most people feel that they will be there for the five-year term and have no plans to move.

Life happens. You might be offered an amazing job in another community. You may come in to money unexpectedly. More unfortunate reasons like marital separation or job loss might put you in the position of having to sell your home.

You may run into financial difficulties and need to refinance to pull equity from your home.

Statistics show that almost two-thirds of Canadians break their mortgage term before the five years are up.

In a no-frills mortgage, with the unexpected situations that arise you could find yourself in the position of having to pay a significantly higher penalty, unable to port your mortgage to your new home, or be unable to refinance.

There are other important considerations when I choose a lender for my clients. Each mortgage lender has slight differences in their policies and calculations.

There are only a few companies left that include Child Tax Credit income in their calculations. For some families this income means the difference between qualifying for their mortgage or not.

Some lenders will use 100 per cent of suite income when evaluating a mortgage application, while others will only use 80 or 50 per cent. This subtle difference can also mean the difference between clients affording a home or not.

Finally, some lenders will not drop their interest rate (or will only do it once) after a mortgage has been approved.

Everything else being equal, I have a few lenders I love to work with as they have exceptional turnaround time and do their best to make applications work.

In my last column, I talked about how the most stressful time of the home-buying process is the wait between submitting your application and finding out you are approved and condition-free.

This last few weeks of crazy rate drops have driven home the importance of choosing a lender that is truly client-focussed.

My young lady doing the Purchase Plus Improvements mortgage has also had her rate reduced by .30 per cent. In her case, this will mean a savings of approximately $6,000 over her five-year term.

Working with an experienced mortgage professional can save you a great deal of stress down the road.

Someone who knows the intricacies of different mortgage products, and has access to different types of lenders, can mean the difference between successfully qualifying for a mortgage or not …. and can help avoid needless expense down the road.

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.

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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