New mortgage rules in place for March 18, 2011

New mortgage-lending rules will be in place on March 18, 2011.

These new changes are two-fold:

1.       People looking to buy a home with less than a 20% down payment will be allowed to have a maximum amortization of 30 years (down from 35 years).  How this impacts first-time home buyers is that it will decrease their borrowing capacity by about $25,000 in purchase price.  This is less than 5% of the total market for first-time home buyers.

2.       People looking to refinance their mortgage to consolidate dept will have the options to refinance to 85% of the value of their home (down from 90%).

How will this impact you personally if you’re looking for your first home?

If you’re looking for your first home, you may need to consider a lesser value home.  In Guelph, the majority of first-time buyers purchase in the price range of less than $250,000.  I find the majority of first-time homebuyers understand the maximum amount of mortgage they can be approved for, and how that differs from what their budget can manage.  Most first-time buyers who I see don’t want to be house poor. 

How will it impact you personally if you’re carrying high-interest credit debt you’d like to consolidate?

If you’re looking to consolidate debt into your mortgage, you will be limited to how much debt can be wrapped into your mortgage.  Once you’ve looked at better ways to manage your debt, your mortgage broker can also show you how to set up a budget to help pay down the debt that you could not consolidate.

How will these changes impact the market?

Remember, the media often publishes stories to sell papers and create buzz. For instance, there have been some recent reports that the housing market will tumble by 25 percent.  There have also been reports that say the exact opposite.  With so many opposing views, what will actually happen?  Locally, the Guelph market has been protected by the downturn in the housing market that some other Canadian cities have experienced.  On average, price appreciation in Guelph will plateau compared to previous years.  When speaking to realtors, they note that we are in a “seller’s market”, which means that there is more buyer demand than houses available to purchase. On the other hand, buyers are being more picky about prices and the types of home they are buying.

Look at getting your pre-approval rate "locked-in" as fixed-rates jump up

The Bond Market affects the pricing on fixed-rate mortgages.  With unemployment figures holding steading, and jobs being added to the economy, bond yields are up and are putting pressure to mortgage lenders to move fixed-rates up.

If you're thinking about buying or selling a home in the next 4 months, one of the best ways to ensure that you'll get a five-year fixed rate below 4%, is to reset your pre-approval rate. You may also want to consider having a second opinion on your pre-approval considering that there will be major changes occurring to mortgage-lending starting on March 18th.

Not only does a mortgage pre-approval help you secure an interest rate for 120 days (4 months), it also can ensure that when you do find a house that there will be no issues with solidifying the mortgage-financing.  Ensure that your mortgage professional has pulled a credit score and asked for income confirmation by way of an employment letter and pay stub.  Credit score and income confirmation are necessary to issue a full pre-approval.  Many banks are getting lazy and only pre-qualifying their customers, which can lead to problems when you've finally found a home.

Beware: Your bank may not be thorough in their mortgage pre-approval

At least once a week, my office receives a call from a panicked customer who thought they where pre-approved for a mortgage, only to find out they weren't.  The reason why the person is often panicked is because the pre-approval for the mortgage was in fact only a pre-qualification.

Here's the main difference between a pre-approval and a pre-qualification for a mortgage.  Protect yourself from any unexpected surprises and ensure that a thorough pre-approval is done before you decide to sell your home and move or even if you're buying your first home.

Also, it's extremely important to speak to you mortgage broker before you list your home (I'll cover this topic in another posting).

Credit Check
Your mortgage broker can pull your credit report almost instantly once you've completed an application.  The broker will review your credit history and accounts to confirm balances on your credit cards and lines-of-credit and car loans.  A credit bureau will also show if there are any collections including any spousal support or child support payments outstanding.  I've also found that in cases where people have common names, there may be errors on the credit history (e.g. someone else's credit can appear mistakenly on your credit history).

Employment letters
If you're an employee an employment or job letter is always a good thing to have when you're applying for a mortgage.  The job letter states the length of time you've been with your employer and how you get paid.  If you've just started a new job, and plan on buying a house, try and negotiate a no probationary period for your employment.  Getting a mortgage approved while your on a probationary period at work can be tricky because technically the individual is not employed "full-time"

Beware: Banks scare customers into not talking to mortgage brokers (part 1)

Just this week, I've spoken to two clients who came to me despite their banks advice, which was "don't go to a mortgage broker for your mortgage".  I asked them why they still decided to shop around for their mortgage and visit a mortgage broker after the banker told them not to.  They both answered in a similar way, "I wanted to see what all the bankers anxiety was about".

The realty is that the majority of people who need to revisit their mortgage because they are moving or refinancing, normally go to their bank and then a mortgage broker.  I suggest it's two hours of time well spent (one for the bank and one for the broker) considering it's the largest debt that most people have and the largest household expense.

I'll be writing a series of articles on the bankers' myths about mortgage brokers:


It's not a good idea to shop around for your mortgage because it hurts your credit score.

For most people who have good credit history, having a few credit inquiries in a short period of time is the normal course of doing business for them and it will not be detrimental to your credit history. 

In fact, I've found that banks have become lazy in qualify people for mortgages and don't necessarily do a credit check until there is an actual mortgage to process.  This could be detrimental for the client who's looking to buy a house.  That's because if there are any issues that the client is not aware of regarding their credit history, and the credit history is not checked before an offer is made on a house, the client may be disappointed to find that the mortgage they thought they could qualify for, is not in fact the case.

At my office we receive about one referral each week from either the bank directly or the client where this has happened.  The client is normally angry or in tears that the proper credit history checks were not completed by their bank. When I do a pre-approval for my clients, we ensure a credit history is done immediately so there are no surpises.

Also, mortgage brokers can shop your mortgage to multiple lenders with one credit history.  If you where to do the same, each bank would (hopefully) do a credit check.

Regardless, when someone does a credit check on you ensure you give them authorization to do so.

More to come on the facts around mortgage brokers...stay tuned.

New lending impacts first-time home buyers

The new changes that have been put into motion by the Canadian Minister of Finance will have a significant impact on first-time buyers.  The impact is the limit on a first-time home buyer’s borrowing capacity.

In Guelph and the surrounding area, most first-time home buyers choose to purchase a townhouse condo.  Most “nice” detached, free-hold homes are out of the price range of a first-time home buyer.  I believe that the average price of a detached home in Guelph is over $350,000.

You can purchase a “nice” town house condo in Guelph for approximately $225,000 – the condo fee is on average $200/month, and property taxes would be approximately $2800 per year. The average household income to support a mortgage with 5% down is approximately $55,000 in this scenario (without any household debt).  Under the new lending guidelines, with a decreased amortization to 30 years from 35 years, the household income would need to be approximately $5000 more per year.  Big deal?  Actually it is.  What I’m finding in my business is that many first-time homebuyers require two jobs just to carry a mortgage on a decent home.  Given the country is in a recession few employers are giving their employees pay raises.

I believe expectations will change among first-time buyers on what they can afford to purchase – and there will be a change in expectations on what sellers ought to sell their home for.

So here’s one important point to consider.  If you know someone who is looking to buy a home in the next six months ensure they speak to a mortgage broker, who has the experience to help. In this market – experience counts.

A financial fresh 2011

Make 2011 a year in which you’ll organize your financial matters. Whether it’s investing more for the future or simply paying off debt, set a goal.

Here are some key ideas when setting up S.M.A.R.T financial goals:

Specific

Specific goals will help you keep laser-focused. Whenever you need to make a financial decision, ask yourself: “Does this work toward my financial goal?” If you’re considering curbing spending, make a spontaneous-purchase goal limit. For example, in our family we use the “two-week rule”. For any purchases over $200, we take two weeks to consider the item before we buy it. For instance, if I just happen to stumble upon a great pair of shoes, but I wasn’t planning on purchasing them, I’ll take two weeks to consider the purchase. Usually the two weeks passes and I’ve forgotten about them, which means I didn’t really need them and it would have been a waste of money.

Measurable

Breaking down your goal into key measures and tracking it helps you achieve your goal. The goal does not need to be complicated. For example, you may want to set a regular investing goal. Many people set a goal of saving 10% of their pay each pay period. You can then work to set up automated withdrawals from your bank account so that as soon as you get paid, the 10% savings comes straight out of your account. This can help make the goal attainable.

Attainable

When you develop goals that are important to you, you start to figure out ways to make them happen. You’ll find your attitude and habits start to change and your goals become attainable.

Realistic

Your goal is probably realistic if you truly believe you can achieve it. There are also logistical things you’ll need to consider.

One simple way to get out from under a debt load is to consider refinancing your debt into your mortgage. Is this goal attainable for you? Ask yourself these questions: What is the value of my home versus the current balance on my mortgage? Is there equity available to pay out debt?

If you do have equity available, pick up the phone and call a local mortgage broker who can help you determine the next step in the process.

Timely

Set a time frame for when you want to achieve your goal. If you’d like to save $5000 in a tax-free savings account, for example, set a deadline for yourself in achieving this goal. You may also want to break the goal down into increments, which will help you attain the goal.

Use the same principals in setting up your financial goals as you would any other goal you have in your life. The beginning of the year is a great time to revisit what you did the previous year and make improvements for the coming year.

Include a financing condition when you put an offer on a home

Even if you've been pre-approved for a mortgage, I recommend having a financing condition.

Whether you're selling a home and moving into another, or you're buying your first home the financing condition protects you should there be a deficiency in the collateral (the house you're buying).

There are several things that could come up if you don't have a financing condition, here's an example of one:

If you have a 20% down payment, most lenders require an appraisal of the property. The appraisal is ordered by the mortgage broker who contacts a Certified Real Estate Appraiser (CRA) to do the work.This is a third part who evaluates the value of the home. With a 20% down payment most lenders to not insure the mortgage against default, therefore the lender wants to confirm market value. If the appraiser, assess the property for less than the value on the offer you've made, the lender will only give the mortgage based on the appraised value. The impact is that you may be short of funds on closing if you haven't discussed this in advance.

Don't feel the pressure to buy a house without a financing condition, even if you've been pre-approved.