14 Apr

Simplifying – Mortgage financing for purchase transactions.

General

Posted by: Robert McCaw

 This post will primarily be of interest the First Time Home Buyer & newer Realtors. (Pretty dry reading otherwise I fear)

 

The majority of Realtors will request that you are preapproved prior to them showing you properties let alone writing an offer on one. This is absolutely a practical position. There are often small things that can come up, such as unpaid parking tickets, which are far simpler to address without the deadline of a Subject removal clause looming. Never mind reversing the downward trend your credit score can have with such issues outstanding.

However a ‘preapproval’ is certainly not all the people believe it to be, as I have written about in the past.

Nonetheless here is the (relatively) complete step-by-step process from Preapproval to completion.

 

Step One – A Simple Mortgage Application

(a far simpler step than is expected)

A simple phone call to a skilled Mortgage Broker (i.e. 613 354-9037 or 1 877 333-4983 x760)

Most clients are unaware that 90% or more of their initial questions and an actual pre-approval (& 90-120 day rate hold) can all be completed by telephone. When I advise people of this during our first phone call I typically hear a great sense of relief on the other end of the phone line as most people’s lives are very hectic either with work, family, or play. Frankly, speaking there is no need to arrange a face to face meeting up front; there is plenty of time for that later in the process.

Within what is typically a 30 min. telephone conversation I get to know a few things about how the client thinks and operates. We also complete a mortgage application in a conversational process (faster and simpler than online or paper & pen) which typically allows me to advise my clients with 95% accuracy as to the maximum mortgage amount they qualify for. In addition to this I am able to send that complete application out to a lender instantly locking down a variety of mortgage rate options.

I do not like to ask my clients to fill out online applications, nor do I like to send them paper applications to print fill out and return to me. Ultimately the conversational approach appears to be preferred by the majority of my clients as well. The most skill testing question I ask is the clients’ SIN. Pretty well every other answer is top of mind and gathering a stack of documents up front is rarely required.

At the end of the application process I will send out an e-mail titled ‘documents’. This is a comprehensive list, tailored during our conversation, of the specific documents that a lender will request to complete a mortgage application.

With a complete application in the system, a Credit Bureau reviewed, and the lender locking in rates – the client is now ready to write their offer with confidence.

 

Step Two

 

Writing the offer; My clients write offers not only with the confidence achieved with Step 1, even more importantly they write with “subject to the buyer receiving and approving satisfactory financing”

. Q.  ‘But hey I thought I was pre-approved why bother with a subject to financing?’

A.  Although you as an individual may be platinum plated, there remains a variety of other variables surrounding the property itself that can turn off a lender, thus going in condition free is never a prudent move. There are a few special steps that can be taken when there is no choice – it is something to discuss verbally on a case by case basis. As a general rule one never writes a Real Estate offer condition free!

Such concerns around the property itself include, but are not limited to;

 

a remediated grow-op, private transaction(non MLS), a non-arms length transaction (family),vendor take back financing, remediated drug lab, Lease land, First Nations Lease Land, Age restricted properties, special assessments (pending or otherwise), any reference to water or leaks in the minutes, any reference to “building envelope”, a ‘fixer upper’, insulation or wiring concerns, a commercial zoning component, livestock is present, etc.

Step Three

 

An accepted offer;

Once we have an accepted offer we update the file with the subject property details and forward the application to the lender for immediate review. It typically takes 24 hours to receive the initial response, during that time we like to gather the last few outstanding documents from the client.

Within 72 hours we typically have a documented commitment back from the lender ideally with all conditions met.

Often there is an appraisal required; this is something that our office will set up for you, as we deal with these companies on a regular basis and will receive better service. The appraiser will contact the client to set up the actual appointment to view the property. Nearly all clients are unaware of this expense (~350.00 on average). The true advantage to the client is that their appraisal is done promptly and professionally by a trusted firm not only approved by the lender (every lender we work with) but more importantly highly regarded by each lender.

 

Step Four

 

The broker’s collection of approval documents;

Just prior to waiving conditions is when the majority of my clients attend my office to review and sign off on a stack ranging from 14 to 22 pages of mortgage related documents. It is important to me that we take the time to work through these documents with a reasonable amount of attention and detail. It is important to most of my clients as well.

Once this final signed collection of documents is returned to the lender, with all conditions met, then the final documents are released to the lawyer’s office.

 

Step Five

 

Signing at the lawyer’s office;

If you have a law office you currently deal with we can work with them to make your transacton happen or we can suggest a law firm that we work with on a regular basis, upon your request.

For standard transactions the process is extremely smooth 99.9% of the time. We are working diligently on that 0.01%.

Hopefully this has brought some clarity to the steps involved in mortgage financing for your first purchase transaction.

13 Apr

Cash Back Mortgage – There is no free lunch

General

Posted by: Robert McCaw

Cashback mortgages have been around a long time, not quite long enough for stories of the pain related to breaking one to have circulated to any degree.

I recently attended a presentation by a lender in which several dozen Mortgage Brokers were asked if they would like to see a “Cashback” mortgage product.  Not a single hand went up.  Why is that?  The vast majority of brokers know that for the majority of clients such a mortgage has far greater pitfalls than benefits.

So, what is a “cashback” mortgage’?

Basically it is a mortgage that is signed at a higher than market interest rate, (this would be the “give”).  In exchange the client receives a % of the mortgage back in cash at signing (for the client “the take”).

The % of cash back offered tends to range from 2% to 5% which can be a very eye-catching amount of money.  The dazzle of that cash often distracts the client from the proportionately higher interest rate which effectively funnels all of the upfront cash back to the lender over the term of the mortgage…with interest.

There is no free lunch.

Even if the client can see that they are paying the funds back over time, they often are still tempted because they need that lump of cash at that well-known time in life that we all need it – Right Now!

However it is important for clients to take a step back and take a breath and look at a few facts.

First one needs to be aware that roughly 60% of fixed rate mortgages are broken early – usually at 38 months.  The deeper meaning of this relates to the type of (and size of) penalties incurred.

Understanding that 6 out of 10 people are basically making the incorrect choice with regard to the term of their mortgage, you in fact have a 60% chance of being in that same group.

Where this really comes into play is not so much that the “cashback” must now be repaid, which it does either in full or pro-rated – either way a major hurdle for many.  After all you were paying that higher rate and additional interest all along and as it turns out it was for no gain and an even larger loss.

The real bombshell is that penalties for fixed rate mortgages are often (these days nearly always) calculated on the basis of ‘interest rate differential’(IRD) and in the case of a cash back mortgage you have opted for a higher than market rate which not increases the likelihood of an IRD penalty being triggered, but it makes the size of the penalty larger to boot.

Anticipate a penalty of approx. 4-5% of the mortgage balance to break a 5 year once you are 30 months in, in addition to repaying the “cashback”.

Bang, Bang, you get thumped twice. 

These products are essentially the lender loaning you more money at a higher rate.  There are better ways to do this as within this transaction lurks a major bombshell.

The Bank is not your “friend”, there is no “relationship”. It is a business that makes staggering profits for a reason.

In Conclusion, buy Bank Shares (they will continue to find more profitable way to separate us from our cash) and enlist an independent Mortgage Broker to walk you through the ups and downs of all the products out there.

There is no free lunch.

13 Apr

Fun with Prepayment penalties…

General

Posted by: Robert McCaw

Within the first few minutes of speaking to a new client about mortgages the number one question that I am asked is always “what is the best rate “ –  invariably clients are referring to the five-year fixed rate .  As such the very next topic discussed is that of mortgage prepayment penalties.

It is been said that statistically 6/10 five year fixed rate mortgages are broken at an average of 38 months, triggering the greater of either a three-month interest penalty or in today’s low rate environment the much more common and somewhat brutal Interest-Rate Differential calculation (IRD).

Clients’ typical penalties are in the order of 3% to 5% of their mortgage balance when an IRD is used as opposed to the penalty of less than 1% when the penalty is three months interest.

As with entering just about anything in life understanding where the exits are and what is involved in getting through them is often the most important part of the process.

Following are some links to the newest prepayment charge calculators from the top banks:

These calculators were inspired by this worthy initiative from the Department of Finance.

If you play around with the calculators, you’ll notice something: The penalties vary wildly.

 

1 Apr

Being Pre-Approved may not be what you think it is…

General

Posted by: Robert McCaw

Most clients think that having a mortgage pre approval puts them in a position to write offers on properties without inserting a subject to receiving and approving financingclause.

Nothing could be further from the truth.

Being “pre-approved” can create a false sense of security.

Although going through the pre-approval process itself is important, the actual term “pre-approval” is not exactly accurate.  In fact it should be called a “conditional pre approval” or more accurately still a ‘rate hold’.

Here is a typical lender response following submission of a file for Pre-Approval;

Thank you for choosing TD Canada Trust, please note that a rate hold only has been approved at this time. The Rate of X.XX% with a term of X years has been processed. Once clients have a valid signed purchase and sale agreement in place, please resubmit for full credit adjudication and decision. Rate will be held for 120 days. Current credit bureaus will be required at time of re-submission.

An important point to be clear on here is that you may be preapproved at a certain rate (which is typically held for 90-120 days from the date of application), not much else other than this rate has any degree of certainty.   There remains a number of conditions to be met as well as variables which can enter into the equation when you actually write an offer on a specific property and as such it is very important that one always includes a subject clause in their offer along the lines of “subject to receiving and approving financing”.

Often clients are reluctant to write an offer on a property without feeling that they are 100% preapproved.  This is an understandable desire, and in some cases clients may be led to believe that this is the case by their lenders, the fact remains that until the lender reviews all related documents not just those that come from the client but also those that come from the appraiser, the insurer (CMHC) and the realtor there is no 100% certainty of approval.

This is why I always insist that clients include arguably the single most important clause in their contract “subject to receiving and approving financing”.  (I am being repetitive with this statement for a reason)

The preapproval process should be considered as more of a pre-screening process than anything.   It should always involve the review and analysis of the clients’ current credit report, a list of all documents that will be required by the client in the event that an offer is written and accepted, (ideally all of those documents would have been reviewed and approved by your mortgage broker in advance of the offer being written).  Clients should also come away from this process with a clear understanding of the maximum mortgage amount they qualify for along with the various related costs involved in their specific real estate transaction.  In the Province of Ontario the Land Transfer Tax is an important one.  Equally important; with a completed application the broker is able to lock in rates for up to 120 days, one specific advantage of an independent Mortgage Broker being that your rate can be locked in with a few different lenders giving you a safety net of one lender has an issue with the property, perhaps over an illegal suite, restrictive covenant, etc.

Why is the lender not fully underwriting my application?

With the Banks, credit unions, etc. the actual conversion rate of preapprovals to ‘live deals’ is less than 10%.  It is for this reason that an actual live underwriter very rarely completely reviews a preapproval application.  It is not an efficient use of resources.  Therefore the bottom line is that the client is really only getting the opinion of the front-line individual with whom they are directly speaking, and that individual will not be the same person that underwrites and approves a live transaction.  This is true of every mainstream A lender channel that I can think of.

It is due to this disconnect between intake of application and actual underwriting of a live deal that the “subject to receiving and approving financing” clause in the purchase/sale agreement is so vital.

Another significant factor is the B20 guidelines, which has undermined the solidity of a client preapproval is the relentless pace of change with regard to lending guidelines and policies implemented not only by the Federal Government, OFSI, but also by the lenders themselves.  In other words it is very easy to walk out of a lenders with a preapproval for a certain mortgage amount only to have it rendered meaningless a few days later when the banks change internal underwriting guidelines with no warning and very little notice to the general public.

Setting aside these concerns there still exists the general concept that although the client may have excellent credit, an excellent job, and a strong down payment –the bank still needs to approve the property which the clients wish to purchase.  Is it on lease land, is it an age restricted building, was there a significant special assessment within the previous five years, have there been building envelope issues, is the property a remediated former marijuana grow-op, is the ‘economic life’ of the dwelling too short to meet lender guidelines, is the property subject to a current rezoning or development application, is the home in a floodplain, is it sitting on a cinderblock foundation, the list goes on and on.

This is perhaps the simplest point I can make – perhaps you the client are ‘pre-approved’ but most certainly the subject property is not – and there are several properties that a lender will not touch these days.

Don’t take anyone’s word that you are approved, look for an email from your broker stating ‘File Complete’ which should arrive no later than 10 days prior to your closing, ideally.

Good luck and may you soon be ‘File Complete’

Contact me at rmccaw@dominionlending.ca , 613 354-9037, www.robertmccaw.ca or “Like” our Face Book Page for more helpful information about your mortgage at The McCaw Mortgage Team, http://on.fb.me/eBQczo