The importance of a mortgage pre-approval

Be ready to seek a mortgage

The subject of mortgage pre-approvals has been beaten to death, but I am going to circle back to this from a different perspective.

Over the last few months I’ve run into several situations where clients have reached out with an accepted offer in hand but have not done their homework with respect to arranging their financing. Sometimes this is not an issue, but sometimes it is.

For everyone involved in a real estate transaction there is a fair bit at stake.

For your realtor, there are countless hours spent preparing and taking you to listed properties. This can involve hours and hours, sometimes over many months, of research, coordination, and travel. When you do find a property that you want to write an offer on your realtor spends a great deal of time preparing and negotiating your offer.

For the listing realtor, there is time spent back and forth with their client and the realtor representing the potential purchasers in addition to the time they have already spent working with the sellers getting ready to list their home.

For both realtors there is much that goes on behind the scenes to make an offer come together. Once a seller has an accepted offer, their home is tied up while they wait to see if you have your financing approved. They may already have an offer on another home so are making plans and spending money on inspections and appraisals for their own potential move. They are also likely excited about their upcoming move and are spending time coordinating everything from new schools or daycare to home insurance and utility hookups.

There is you. You have spent hours watching Realtor.ca and scouring listings to find your next home. You have explored potential neighbourhoods and spent days checking out possible homes. You have made arrangements to move and are excited about the home you’ve found.

Then there is your mortgage person. I love what I do, and feel a great deal of satisfaction when I can find a lender for a complicated situation. Complicated situations take hours and hours of time and research to find suitable (and palatable) solutions. Each application and client is slightly different, and lenders have adapted to offer a wide range of mortgage products to suit most situations. However, sometimes just because we are able to find a mortgage approval for you does not make it wise to move forward with a purchase.

Lenders have different criteria and programs. Most are looking for a few basics to be in place:

• Are you working consistently?

• Have you paid your previous credit facilities on time and as agreed?

• Do you have a down payment organized?

Mortgage options can change based on the answers to these questions. There are a few other things that are important:

• Have you been bankrupt in the past? Are you discharged from your bankruptcy?

• Do you have any spousal or child support payments?

• If your income is casual or commission-based, do you have a two-year history?

If you have not done your pre-work and it's been a while since you last applied for a mortgage you may be shocked to learn that you don’t qualify for as much as you used to. You might be horrified to know that even with 20% down, the only option we can find is a private lender. You may not be able to wrap your head around the fact that your financing team cannot find a suitable option because of a written-off fine that you thought was not big deal. It is heartbreaking to learn that you don’t qualify for the mortgage you need.

I cannot stress enough the importance of doing your homework to have your financing lined up before you start shopping. I also cannot stress enough the importance of full disclosure with your mortgage person. Sharing any of the skeletons in your closet can help us get ahead of any problems they may cause.

I really take it to heart when I can’t find a suitable option for good people. I want to set my clients up for long-term success and make sure I am not setting them up for disaster or disappointment.

I do love spending as much time as needed educating my clients and helping them prepare so that when they are ready to move forward we find a great mortgage product for them.

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On a different note, if you are a homeowner, you should have your 2023 tax bill by now. Make sure you read the form and claim your Home Owners’ Grant.

If this is your first year in your home and your lender is collecting your property taxes for you, check the upper right corner of your tax notice to make sure it shows your lender. If not, reach out to your mortgage lender (or broker if you worked with one) to make sure the lender is paying your property taxes as agreed.

Every once in a while there is a disconnect and it is far easier to sort out ahead of time as opposed to when you get a notice in August that your property taxes are owing.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Buying property with your head, not your heart

Emotional mortgaging

For the last few months, I have felt a bit of a return to normal in the mortgage world.

Fixed rates have been trending down and we’ve seen some great rate specials available. More importantly, it has felt like a more balanced market where people are taking a bit more time to do their due diligence and make more educated and thoughtful (as opposed to emotional or panicked) decisions about their home purchases.

The last few weeks I’ve felt a subtle shift. The housing market is starting to heat up a little. I’ve seen a few situations where there are multiple competing offers. Inventory still seems a little low which is likely fuelling this.

I have been dealing with two families who have taken completely different approaches.

The first family is looking to “right-size” their home and move from a condo to a single family home. They already have two children and a third on the way. They want more space and a better neighbourhood to raise their children in.

They wrote an offer on a lovely home before they looked into their mortgage options. They came to me with an accepted offer and are madly in love with the home they wrote the offer on. They are willing to move heaven and earth to make it happen. The challenge is they have not had an offer on their condo yet.

They both make great incomes and have investments that will cover the necessary down payment. The trick is if they have haven’t sold and have to move forward with their purchase, they will have to use a private lender to make it happen because their ratios are too high carrying both properties.

Two years ago I might not have been so concerned but with the market being a bit slower there is significant risk that their condo might not sell in the timeframe they need it to.

If that happens, and they choose to go the private lender route, they are looking at roughly $20,000 in fees and closing costs and an interest rate of 10%. Monthly payments would be $4,400.

They will not be able to rent out their condo because of restrictions in their strata. With strata, property taxes and their mortgage payment, they are looking at about $2,600 per month for that property.

If they end up having to carry both of the mortgages for more than a few months, they are going to burn through their savings very quickly. They may end up having to drop the price of the condo significantly, which means they might take a loss on the condo as their mortgage balance is close to the break even mark after realtor fees.

They are determined to move forward regardless and quite honestly it concerns me.

Another family I am working with has taken a different view.

Similar situation and they can more than cover both mortgages if they have to. They have done a very thoughtful analysis of their finances and lifestyle and have taken the approach that it will all come together if it is meant to, and that if their current home doesn’t sell, they will not put themselves in jeopardy to buy that particular home. This approach makes me much more comfortable.

What is the danger in the first situation? If for some reason they do move forward and their condo doesn’t sell for several months, I don’t think they will be able to afford the payments on both homes. If they fall behind they will have no buffer left and could potentially end up in foreclosure.

Maybe it doesn’t get that drastic, but the stress of carrying both properties will be overwhelming.

Before you write an offer on a home, I cannot stress how important it is to connect with a mortgage professional to get your financial ducks in a row. Knowing what you qualify for, and if you qualify, as well as the costs of making a move will help set you up for success.

There is often a way to arrange temporary financing to cover both homes, but the big question is does it make sense to move forward if you are madly in love with a home?

Only you can make that decision.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Bridging the gap between selling and buying

Bridge financing

As always, before I sit down to write my column, I tend to notice a theme of what’s happened over the last few weeks.

Recently, this has been the challenge that many clients are facing when they own their home clear title (no mortgage owing) and they want to sell and buy another home. Sometimes this is to downsize, sometimes it’s to move to a different community, and sometimes it is to get away from their current neighbours.

Whatever the reason for the move, offers to purchase that are presented without a subject to sale of a home condition are far more attractive to sellers.

Many times clients have found their next property without having listed their current property for sale.

As a sweeping generalization it is mostly seniors I see in this situation. They’ve worked hard all of their lives and paid off their homes. They live on pension income and for the most part live comfortably. Some have significant investment portfolios.

If they want to move forward without a firm sale on their current home, clients can sometimes put themselves in a precarious position.

Even a year ago this might not have been such a challenge. Interest rates were half of what they are now (if not less) and homes weren’t on the market more than a day or two. Most people were confident that they would sell in a few days.

Again a sweeping generalization, but I’m seeing homes sitting on the market for weeks and even months in some cases. If you were to write an offer counting on the sale of your home you had best make sure you have a back up plan in place.

What does a backup plan look like?

For seniors on a fixed income it is difficult to qualify for a large mortgage if that is what’s needed. There are niche mortgage products that are built specifically for clients with significant net worth. These products allow for extended ratios based on the overall financial picture versus strictly how much income is available to make mortgage payments.

Another option (for clients 55 or older) is a CHIP Open mortgage. This allows older clients to pull equity from their current home to make a sizeable down payment on their next home in the event that their current home doesn’t sell. Unlike the traditional CHIP Reverse mortgage, there is no penalty to pay the mortgage in full regardless of how quickly their home sells.

It means no payment on the down payment funds, and theoretically a smaller mortgage on their new home until the current home is sold.

I’ve also used a credit line on the current home for the down payment on the new home, which again can be paid off with no penalty.

There are alternative lenders that will register an interalia mortgage over both homes that can also be paid in full with no penalty once the current home is sold.

The fees and costs associated with each of these options can be very different. Even though you may be incurring a slightly higher cost, by having one of these options in place you are able to move forward with your purchase to make sure you are able to buy your dream home without having to wait for a firm sale on the home you are in.

Best case scenario is that you have a sale on your home that lines up with the dates for your purchase. Next best case is that you have a firm sale and only require bridge financing which can be quite a bit simpler to line up.

If you are finding yourself in this situation, I encourage you to speak with a mortgage professional to look at your various options. I would also encourage you to do this well ahead of writing an offer so that you know exactly what you qualify for and how much it will cost you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Read your mortgage renewal offer carefully and get help from a mortgage professional

Handling mortgage renewal

Twice over the last week, I’ve had conversations with clients regarding their mortgage renewal offers that have really concerned me.

If you are new to the mortgage world, when you first get a mortgage you choose a term of anywhere from six months to 10 years. Your interest rate (if fixed) is locked in for this period of time. At the end of whichever term you chose, your mortgage is up for renewal. You can choose to stay with your same lender or look for another lender.

As a rule, when I am working with my clients leading up to their renewal date, I research to see what is available for them in terms of options. If they are planning to renew their mortgage without making any changes the first place I check is their current lender.

Signing a renewal offer is pretty straightforward. You consider the options presented by your current lender, select your preferred choice, and sign on the dotted line.

If clients are planning on going this route, I offer guidance and support to try to get them the best rate possible with their current lender. Unless there is a dramatically better offer with another lender this is the path of least resistance for you.

For my own clients, I selected their original lender for a combination of reasons so it often makes sense for them to stay put.

If clients are wanting to pull equity from their home or add a credit line to their current mortgage then we look a little further afield.

The two conversations that concerned me this week were with clients planning to stay the course with their current lender. Both clients were with the same lender. Their renewal offers arrived with the rate of 6.14% for a five-year term. In one case, the clients had an insured mortgage, and in the other the client owed less than 50 per cent of the value of his home.

For perspective, most lenders are offering around 4.64% for insured mortgages right now. Several lenders, including the one both of these clients are with, are offering the same rate for clients who have more than 35 per cent equity in their homes.

After several back and forth requests with the lender, both of these clients signed their renewals at 4.64 per cent. For the larger of these two mortgages, the interest difference between the two rates amounted to a savings of $26,673 over the next five years. Better yet, the difference in the monthly payment was $328.94.

With costs soaring across the board, $328.94 a month goes a long ways towards covering other expenses.

What was particularly concerning for me was a comment from one of these clients.

“If you hadn’t reached out to help us with our renewal, we would have just signed off thinking that was the best rate they would offer us,” she said.

I cannot stress enough how important it is to connect with a mortgage professional to look into your mortgage renewal options. Have your mortgage balance at renewal available, as well as the value of your home. It is also important to know if your mortgage is insured (when you purchased you had less than 20 per cent down payment).

Having this information handy when you reach out to your mortgage professional will help them narrow down the best options for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.