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The-Mortgage-Gal

Stress test hasn't changed

Canada Mortgage and Housing Corporation (CMHC) recently reversed a policy decision implemented in July 2020. We’ve had a flood of calls asking if this means that the stress test is gone or has changed.

The short answer is that these changes do not include changes to the stress test.

According to a press release on July 5, 2021, CMHC has reviewed and reversed temporary policy changes that were implemented in July 2020 to protect consumers from the uncertainty surrounding the pandemic and slow the housing market.

The changes introduced last year included:

Reduced debt servicing guidelines from a maximum of 39 per cent Gross Debt Service Ratio (GDS) and Total Service Ratio (TDS) of 44 per cent to 35 per cent and 42 per cent respectively
A minimum credit score of 680 for borrowers

At first glance this might not have seemed like such a big deal. There are three companies in Canada that provide default insurance to lenders: CMHC, Sagen (formerly Genworth), and Canada Guaranty.

Certain areas were affected by these changes more than others. CMHC has several niche products that the others don’t provide. As an example, CMHC is the only insurer that provides default insurance for homes on First Nations leasehold property.

I am working with one amazing couple who lost out on a beautiful home in West Kelowna because of this. They would have been very near the top of their ratios at 38 per cent GDS and 39.5 TDS but did not qualify for the home they fell in love with as they were over the 35/42 CMHC guidelines.

This was really disappointing as these clients have worked incredibly hard to save their own down payment and are meticulous with how they manage their finances.

My speculation is that CMHC felt the other two insurers would follow suit and change their policies to match the changes rolled out last July.

Instead what happened is the other two kept their guidelines status quo. CMHC lost a significant amount of market share and this move did not seem to achieve the underlying goal of cooling a crazy housing market.

I was encouraged to see CMHC reconsider and revise these policy changes.

Changing gears a little – if you are in the process of purchasing a home now that fire season is here, please make sure you talk to your realtor and insurance provider about how fires in your area may affect your purchase.

One of the conditions every lender includes to your solicitor is confirmation of home insurance. Most insurance providers will not issue new policies if there is an active fire within 50 kilometers of the home, so do not leave purchasing your policy to the last minute.

Most purchase contracts now include a clause to allow for this situation, but better to be organized ahead of time and know what you are dealing with as opposed to finding out at the last minute that your purchase has to be pushed back.

Stay safe.





Risky subject-free offers

When you start down the road of buying a home there are many new and unfamiliar terms you may hear. Arguably, some of the most important things you need to learn about are the “subject to” conditions to include in your offer to purchase.

When you write an offer to purchase a home, your realtor will offer guidance as to the conditions you include. Common conditions you will see are:

  • Subject to arranging suitable financing
  • Subject to a satisfactory home inspection
  • Subject to arranging home insurance
  • Subject to review of strata documents
  • Subject to the sale of your current home

If you are purchasing a rural property or are in a unique situation you may also see:

  • Subject to a water potability test
  • Subject to an inspection of the septic system
  • Subject to the seller finding a suitable home to purchase

These lists are not all-encompassing by any means.

The purpose of adding conditions to your offer is to protect you in case there are any issues with the home you are looking to purchase.

In previous columns, I’ve written about the potential dangers of writing a subject-free offer. The high-level, quick position is that if you write a subject-free offer you’d better have cash on hand to buy the home.

Over the last two years, I’ve seen multiple clients feeling like they have been forced to write subject-free offers just to be able to have their offer accepted by the sellers.

I have worked with several clients over the last few months that have written subject-free offers. We do absolutely everything ahead of time to try to ensure they will be successful with their financing.

These files stress me more than you can possibly imagine.

My advice to clients who require financing to purchase a home is to include a subject to financing clause in their offer. The reality in our market is that by including that clause, sellers tend to choose other offers that do not have a financing clause.

Out of desperation clients are writing subject-free offers.

What are the dangers of writing a subject-free offer?

One file I saw last year involved the purchase of a strata unit. The condo itself was beautiful and my clients were ecstatic to nail down an accepted offer.

When we received the strata documents from the listing realtor, it was evident that the strata had been poorly managed. There was extensive work that needed to be done to the building, and the strata did not have anywhere near the funds it needed to complete work that urgently needed to be done.

When the lender and insurer reviewed the strata documents, they declined the file and flagged the condo complex. My clients were initially devastated.

They had written in a subject to financing clause, so they were able to collapse their offer.

What likely would have come shortly from the strata was an increase in monthly strata fees, a levy or special assessment against each of the units to raise money quickly for the needed repairs, or a combination of both.

Had they written a subject-free offer they would have been in a very bad spot.

There are certainly other dangers, like skipping a home inspection and finding major issues to contend with once you are into the home.

Make sure you do your due diligence and have your ducks in a row as you move forward with an offer to purchase.

If you are selling a home, please consider looking at offers that include a subject to finance clause. All of the realtors that I know work closely with their clients to make sure they have their financing lined up before writing an offer.

There are some amazing people out there looking to buy homes. Don’t rule them out.



No isn't always no

Over the last few weeks I’ve had a few (pleasant) surprises with files I’ve been working on.

When I take new applications from clients, I ask for all their documents upfront. Before I send them out shopping, I thoroughly review everything to be certain I will be able to get them an approval that they will be happy with.

If I know I can’t get their ideal approval, I will offer options that I see based on their particular situation.

If they are asking for a purchase price that is higher than what I see they qualify for, I let them know and suggest ways that we can potentially increase their borrowing power.

Sometimes, if I can see that there is no way I can get an approval at this time, I let them know. If I know where they can get an approval I will refer them to someone that I think might be able to help.

For example, for mobile homes in parks, I will send people to one of the local credit unions or a chartered bank.

About three weeks ago, I started working with a young couple. They are in northern B.C., so the price points are a little different.

Based on their income and loan payments, I was comfortable with them shopping at the $200,000 price point. They had a house in mind and it was priced at $210,000.

They said that they had been to one of the chartered banks and that the lender there told them he could absolutely get them to the $210,000 price point.

They moved forward with an offer, and paid for a home inspection, water test, and had someone out to inspect the septic system.

On the day of subject removal, their banker came back and said that he couldn’t actually get their file approved.

I hate when this happens. This is why I am so particular upfront.

They came back to me to see if there was anything we could do.

I did some research and found a lender that would go to their area and ended up placing them with a lender that had a cash-back program. By using the cash-back mortgage, we were able to access enough money that they could pay off one of their loans so that the ratios were in line.

I am not keen on the cash-back programs for a few reasons, but every once in a while they are the fit that clients need to be able to buy a home.

Another northern client wrote an offer on a home that was straddling three different parcels of land.

The first two lenders I approached wanted to support the client’s application, but required a new survey and a second appraisal as the purchase was a private sale (versus a property listed on MLS).

The fifth lender was fine with the property and we had an approval at a great rate.

Sometimes, when one lender says no, another may be open to approving your application.

If you are struggling to get your financing in order a second set of eyes might be very helpful. If you have applied at your usual chartered bank and are told no, it may be worth exploring your options.

There are many great mortgage professionals out there who may be able to find a great solution for you.



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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.



More The Mortgage Gal articles

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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

 



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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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