Home Mortgage Loans
Owning real estate is an important part of building wealth. Like most areas of personal finance, buying a home may seem straight forward. To increase your chances of financial freedom you can take a more strategic approach.
When buying a home, your mortgage broker should be your first call. Alongside your realtor, they will help you with all aspects of your transaction. Understanding your mortgage options can be complicated without a mortgage broker. It’s like going to court without a lawyer. You may make costly mistakes on your own.
PASS THE MORTGAGE ‘STRESS TEST’
The mortgage stress test first came into effect on October 16, 2016. It requires all regulated financial institutions to qualify borrowers using this test.
Banks must use a qualifying rate that is either:
- Equal to the Bank of Canada’s five-year benchmark rate or
- The contract rate plus 2% whichever is greater.
This regulation affects all six of Canada’s big banks as well as many smaller lenders. In the beginning, it was for borrowers with less than 20% down payment.
On January 1, 2018, the second version of the ‘stress test’ came out. It included ALL consumers, including mortgage borrowers who have 20% down payment or more. These stringent mortgage qualifications catch many borrowers off-guard.
The buying power of Canadians has dropped a lot. We cannot underestimate the importance of being pre-approved. Know your limit and buy within it! Pre-approvals are very different from a ‘bank pre-qualification’. Pre-approvals need a higher level of expertise and take a lot more time. A quick pre-qualification leaves the buyer vulnerable.
Top real estate professionals will appreciate that you are pre-approved. They will want to know exactly what your upper limit is before they begin shopping with you. Prospective vendors may be more likely to negotiate with a pre-approved buyer.
- Pass the mortgage ‘stress test’
- Time to correct any credit or documentation problems in advance
- Quicker subject removal and closing will avoid disappointment
COVER YOUR ASS-ET
There are many things to consider such as the price, the neighbourhood, the style, size, and floor plan. Then you must find out if the property and structure itself is sound? Sellers may not disclose potential deficiencies and risks associated with the property. Some may be unaware of problems or have never even lived in the property.
Hiring a property inspector to determine the condition of the property is important. In a calm market, you have the luxury to include it as one of the conditions in your offer.
Remember, your final mortgage approval is not based on you alone. The lender and insurer also need to approve the property.
The property is the physical collateral for the loan. The lender will look at your borrowing track record, credit, and ability to repay the loan. And then the property itself becomes part of the approval process.
In high ratio mortgage approvals, the insurers are CMHC, Genworth or Canada Guaranty. They have the final say. In conventional properties, the lender will want an appraisal to confirm the value.
KNOW YOUR LIMIT AND BE INFORMED
Knowing how much house you can afford is a great starting point when searching for your next home. Now it’s time to decide on a case by case basis how much you are willing to pay for a specific house.
Always know your walk-away price range and understand there is going to be another house. This will allow you to negotiate better. Is it a waste of time to make an offer on a home that is way overvalued? You never know unless you try. It’s worth a shot!
Remember, it’s easy to get value in a rising market because the value will likely increase after you settle in. In a buyer’s market the opposite may happen, and the property value could drop if the market is declining. It is so important to be aware of market conditions, trends and actual values to avoid overpaying.
Make sure you are well informed of property values. Don’t rely on outdated information. The Home Price Index (HPI) is like the Consumer Price Index (CPI). It provides buyers with an accurate method of following price trends.
Is getting a bargain high on your priority list? Are you prepared to walk away from your dream home if the price is too high? In most cases, there is no such thing as a good deal without a motivated seller.
It takes dedication and tenacity to find one. Motivated sellers need to sell to move forward with their other plans. It may take time to find the right home at the right price, but if you make it a high priority you will have success. They must have a pressing need to sell, and that is your golden opportunity to buy.
People need to sell for many reasons. They may be going through a divorce, have a death in the family, job transfer, or financial distress.
When there are few buyers, motivated sellers are more willing to negotiate. They will agree on a realistic sales price that benefits both parties. Remember the wise old investor advice: “Real estate profits are made on the buy, not the sale.” Know in advance where you stand in the balance between value and patience.
USE A MORTGAGE BROKER
You need a professional to negotiate the lowest rates and best terms. Especially if it’s your first go-around as you are navigating the unknown. Mortgage brokers provide personalized advice and customized systems to guide you. They will help you avoid unnecessary delays and expensive oversights.
Licensed mortgage brokers are independent, and do not work for any specific lender. They provide unbiased advice. They work for you, offering access to far more options than if you were to go it alone.
A mortgage broker will do a complete pre-approval to ensure you qualify for the loan. They will verify your documentation and make sure you pass the stress test. Your pre-approval will protect you from rising rates for up to 120 days. During the home search, mortgage interest rates may fluctuate up or down.
Your broker will re-evaluate if rates change. Once you have been pre-approved you can focus on doing your due diligence of the property. You don’t want to worry about digging up your tax returns at this point. By the time you are ready to write your offer, you should have provided all the required documents. The only outstanding condition should be approving the property.
THE BOTTOM LINE
Even the most experienced and savvy homebuyers may find it challenging on their own. There are new rules in place that many experienced home buyers are unaware of. For example, all borrowers must pass the new mortgage stress, as covered in this article.
Securing a loan approval can feel like an unfamiliar world, with so many new rules and new conditions. Don’t go it alone. Seek the help of professionals.
The right person can save you from frustration and opportunity costs. Selecting the right realtor, lawyer and mortgage broker will save you both time and money.