Real-estate craziness

I’ve been doing a lot of thinking lately about the benefits of home ownership.

Recent events have driven home the importance of family, stability, and security, mostly highlighting how important these are to children particularly.

The recent increase to the stress test rate has moved the goal posts yet a little further away for many families.

During the last few weeks, I tried to connect with my clients that had pre-approvals to ensure they were aware their potential price point had dropped.

The timing of the roll out of this increase was interesting. I had already felt a little softening in our market. Although still busy, I think more clients are taking a breath and stepping away from the craziness that we’ve seen during the last few months.

My hope is that we see the process of buying a home go back to a more balanced journey.

In the olden days (say three or four years ago), clients would view multiple homes in a few weeks or months and find one that they loved.

They would present an offer, generally lower than the asking price, and counter back and forth several times with the sellers until both parties agreed on the price and closing date.

That left a reasonable number of days for:

  • Their subject removal
  • Their mortgage person would be able to arrange suitable financing
  • They would have time to organize a home inspection and their home insurance.

Heck, they might even have time to read their new financing documents before they signed.

I have seen some crazy displays during the last 1½ years.

  • People writing offers significantly over the asking price with no conditions.
  • People buying homes that might not be the best fit out of desperation as they couldn’t get in fast enough to write offers.
  • People jeopardizing their financial futures just trying to have their offer be accepted.

This craziness has heightened the stress level for almost everyone involved in the process.

During the last two months, I’ve seen multiple mortgage brokers and lender staff members leave the industry as they don’t want to deal with the stress anymore.

Owning a home in Canada is, of course, a privilege, not a right. However, for me, the ability to own a home and provide a stable foundation for my children is one of the reasons that I am so grateful to live where I do.

I sincerely hope that our market swings back to a more level and reasonable playing field so that more families are able to provide stability and security for their children and themselves.


Mortgage rules tightening

During the last few weeks, we have been waiting for an announcement regarding the mortgage stress test rate.

That announcement came last week.

Effective June 1, all borrowers will have to qualify for their mortgages based on a rate of 5.25%, which is up from the current qualifying rate of 4.79%.

This change was rolled out for implementation within less than two weeks. We are still waiting for clarification with respect to how lenders will be handling files already in progress.

I anticipate we will see a flurry of activity before the June 1 implementation date.

What does the impact of this change look like?

As an example, working with these numbers:

  • Family income of $80,000
  • Property taxes of $3,000
  • Strata fees of $300 monthly
  • No other significant debt
  • Down payment of $25,000

With the stress test rate at 4.79%, this family would qualify for a purchase price of approximately $375,000.

With the increased stress test rate of 5.25%, and everything else staying the same, this family will now qualify for a purchase price of $350,000.

While the intent (I feel) is to slow down a crazy housing market, I think the people that will be most significantly affected are lower-earning home buyers, and home buyers with less down payment to put toward their purchase.

While they may have been sitting on the cusp of being able to buy a home, this increased stress test rate will prevent even more Canadians from entering the housing market.

What it does mean is that more affluent people will continue to buy properties for their rental portfolios and less wealthy families will have to stay on the rental treadmill for a while longer yet.

Home ownership is a privilege, not a right. I get that. But raising the bar so that fewer are able to afford their own home is truly disappointing.

I talk to multiple clients every week who are paying more in rent than they would pay for a mortgage on the same property.

The key takeaway here is that if you are out looking to buy a home, or have a pre-approval in place, is that you need to connect with your mortgage person right away to see how this change might affect your borrowing power.

If you’d like help figuring out what you qualify to borrow, feel free to reach out. We are happy to run the numbers for you.

New mortgage or refinance?

After the last few months of craziness in the housing market, I’m hearing from clients reevaluating whether they still want to upgrade to a newer or larger home.

They are getting frustrated with being sucked into bidding wars and feeling like they have to pay significant amounts over list price just to buy a home right now.

Several of these clients are first time home buyers, so they are going to hold tight renting for now.

One couple decided to move into their parents’ basement so they can cut costs and save more toward their down payment.

Two other families have decided to refinance their current homes to do massive renovations. Both love their current neighbourhoods, but wanted updated finishes and more modern floor plans.

By refinancing their current homes and staying put, they are still going to be able to accomplish this.

Due to the increase in the values of their homes there is enough equity to cover the costs of the renovations they are planning.

How does this work?

Current guidelines allow clients to refinance to 80% of the value of their home. For instance, if your home appraises at $500,000. you could refinance to a total of $400,000.

If you bought your home several years ago, it is likely the value has increased enough to allow for a refinance. Let’s say you bought your home ten years ago for $400,000.

Depending on the amortization and payment schedule you chose, let’s say your mortgage balance is now $300,000. The current market value of your home is $600,000.

This means, provided you qualify to carry the larger mortgage, you could refinance up to $480,000.

I don’t recommend maxing out your mortgage based on current values, but considering pulling some equity to renovate or expand your current home might be a great option as opposed to jumping into the fray of trying to buy a newer or larger home.

This might also be a great option to prepare your home to sell if you are definitely planning to move.

Presenting your home in its best light may increase the value to put you into a different price point if you do want to sell.


Mortgages going sideways

This morning, on one of our broker forums, I read a question from another broker.

He asked which lender would be able to finalize a mortgage for April 30 if he submits the application April 26.

In a nutshell, other brokers commented that this would likely be impossible right now. Five business day turnaround is quite a feat at the best of times.

I’ve done it twice, and it makes for a very stressful five days.

I cringed inside for this broker. My guess is that something went sideways for this file the week before closing. It happens.

How can this happen? There are a couple of things that come to mind.

Lenders each have their own way of doing things. Some require full documents at the time of submission for approval; others will issue an approval with a list of items (conditions) that need to be confirmed prior to the mortgage finalizing.

With the benefit of age and experience, my goal is that my clients have all of their lender’s conditions signed off before they remove their financing condition and make their Offer to Purchase a firm and binding contract.

Beautiful in theory, but it seems like in this crazy market it rarely happens.

Why mightn’t all of a client’s mortgage conditions be signed off before their Offer was considered firm?

With the craziness in our housing market right now, many of the participants are starting to bog down due to the overwhelming volumes. Spring is always busy, but this year has taken things to a whole new level.

  • Lenders who normally have 24-48 hour turnaround times for approvals and document review are now running at double or even triple that.
  • Because so many people are writing offers significantly higher than the original asking price, more files are requiring full appraisals to confirm market value. Appraisers are booked in some areas over three weeks out.
  • Many companies have modified work arrangements for both their HR people and their employees, so having employment verifications completed in a timely manner can be an issue.
  • Strata documents can sometimes take more than a few days to arrive.
  • Many clients are writing offers with seven-day subject removal dates to make their offers more attractive.

In normal times, one week for subject removal is tight, but manageable provided everything lines up.

Another reason lately is that clients write a firm offer with no conditions. I’ve had multiple clients go in with subject-free offers because in the current sellers’ market this seems to be the only way they are able to negotiate an accepted offer.

Even though the Offer to Purchase may not include a financing subject, unless clients are purchasing their home with cash any lender approval will include conditions that need to be satisfied to finalize their approval.

Recently, clients wrote an offer with no financing subject, but thankfully included a clause about receipt of a satisfactory home inspection. We had an appraisal done, and the value came in slightly higher than what the clients had negotiated.

All their conditions were signed off by the lender. We were in great shape.

As it turned out, the home inspection on this much sought-after property revealed significant structural issues that needed to be addressed. The initial estimate for the work was just over $100,000.

Had the clients gone in with a subject-free offer, they would have been stuck closing on this home or losing their $50,000 deposit and potentially being sued.

Worse yet, had their realtor not included the home-inspection clause they would have closed on the house and found out after about the extensive work needed.

About two years ago I worked with a young, self-employed client. He had a well-established business and was making a solid income. We needed to use a specific program for self-employed clients and I took his application to a lender that promotes themselves as being the best lender for this program.

After two weeks of back and forth with the lender trying to have the client’s income confirmed, the client negotiated a week-long extension for his financing condition.

After another week of back and forth with the lender, they were still asking for more documentation. The client was not able to negotiate a further extension so removed his financing condition rather than lose out on this home.

We continued to submit more documents that the lender asked for. The requests were starting to border on absurd.

We were getting down to the wire and the lender was still asking for more documentation. Each time we sent in what they requested, it took at least three days to hear back from them.

I was beyond frustrated and I’m sure the client was stressed beyond belief. I know I was.

I had escalated the file and had my lender liaison helping from her end. On the Friday afternoon, one week before closing, the person reviewing documents on the lender’s end told me it wasn’t his problem. The client would just have to close a few days late.

This is not how things work with purchases. Clients don’t get to randomly close whichever date the lender deems appropriate. My head legitimately blew off that afternoon.

So the weekend before closing, I submitted the file to my favourite lender for approval. I had every conceivable document packaged up and sent in for review on Sunday afternoon.

I knew if any lender could make the file come together it was this one.

This file did close on time. This file reinforced for me that choosing a lender I could count on saved everyone a significant amount of stress.

Sometimes, even when all of the conditions have been signed off and it appears that all is in order, something can come out of the blue that can derail a mortgage approval.

Clients me from time to time “So my mortgage is all approved and signed off now right? They can’t cancel it?”

The answer to that question is that any lender can cancel an approval right up to moments before closing, if something comes to light that materially changes your mortgage application.

Some lenders re-check credit histories or double-check employment shortly before closing if your approval has been signed off for a long time prior to closing. They may also google their clients to see if anything pops up.

If a lender finds things like new loans that change your financing ratios, a change in employment, or something sketchy on-line, you might find yourself in a bind.

I am seeing more clients decide to step back from the market and hold off on purchasing due to the state of our market.

I am hoping that more people take a breath and don’t get sucked into the frenzy and put themselves in a bad situation. Will we see things slow down? With last week’s announcement that rates may start to climb the second half of this year, I suspect not.

If you are looking for a home, make wise decisions and have your ducks in a row. Don’t get pressured into making decisions you may regret down the road.

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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 www.okanaganmortgages.com

Visit their blog at 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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