28 Oct

KNOW WHAT YOU CAN AFFORD BEFORE YOU BUY

General

Posted by: Robert McCaw

 

Before home buyers go shopping for a home, it is important to know what you can afford before you buy. It is becoming more common for home buyers to make an offer, get declined for the mortgage and the deal collapses. This is stressful for everyone involved, including the buyer, the seller and the realtor. Make it easier on yourself by understanding what you can afford and all your options first.

Always start by asking yourself “How much do I think I can reasonably afford to pay for my mortgage, taxes, strata and heating costs per month?” Then we can use that number and work backwards to see what you can afford within your budget. This approach can help to ensure that your monthly housing costs meet your means.

As a mortgage professional, we consider three things for mortgage approval, your credit history and score, your ability to make the mortgage payments (gross monthly income) and your monthly debt obligations (loans, credit cards, other mortgage payments, child support, etc). I also suggest buyers have a monthly amount in mind they feel comfortable paying for their mortgage, property taxes and strata fees. For example if your budget allows for $2,000 per month after we allow for $200 for property taxes each month and $300 for strata fees each month we have $1,500 per month left to cover the mortgage payment.

Even if you think you can afford that payment each month, the lender uses two simple calculations to determine the maximum mortgage and payment you can actually qualify for. The first calculation, your Gross Debt Service Ratio (GDS), requires your monthly housing costs (mortgage principal and interest, property taxes, and half of the monthly condo fee if you are purchasing a condominium) should not be more than 32% -39% of your gross monthly income. The second calculation requires your entire monthly debt load (including housing costs and other debts such as car loans and credit card payments) not exceed 40%-44% of your gross monthly income. This figure is your Total Debt Service ratio,(TDS). The range of debt servicing will depend on your credit score, so it is wise to estimate on the lower numbers to start. To qualify for $2,000 per month in payments you would need to earn at least $6200 per month gross (before taxes), which represents 32% of your income for the GDS. Any additional debt for loans and credit cards should then not exceed the 42% TDS limit.

Once you determine your fit within these limits, you can get some idea of your monthly payment. I can then determine the maximum mortgage added to your down payment to set the maximum purchase price and you will know what you can afford before you buy to avoid any last minute pitfalls in buying your home.

The mortgage pre-qualification process is as simple as completing an application online via ww.robertmccaw.ca or a phone call at 1 877 333-4983 x760 and then a conversation to review – approval can happen 0n the same day and you can be on your way.

“Thanks to my DLC colleague Pauline Tonkin for this article”.

 

 

28 Oct

A PRE-APPROVAL IS NOT REALLY A PRE-APPROVAL

General

Posted by: Robert McCaw

There is a misconception out there that once you’re pre-approved, you’re good to go. A pre-approval simply means that based on your CURRENT income, expenses, down payment and credit you SHOULD be able to get fully approved once you find the right property (this is the first half of the equation). Many places won’t even pull a credit check (which is extremely important) and will just run a basic mortgage calculator and say “everything looks good” but that doesn’t mean anything. You leave thinking great, I’m pre-approved!

I always recommend that people put in a “subject to financing” clause with their realtor when they are putting in an offer to protect them each and every time. Here’s why:

You could be pre-approved but the lender still doesn’t know which property you’re purchasing (that’s the other half of the equation). Let’s say you find the house of your dreams (well within the maximum price that the mortgage broker went over with you) but we find out that the house was a former grow op. In this case, very few lenders will even look at this (even if it’s been fully remediated and there’s a stamp from the city saying it’s all good) and if they do, they’ll usually require a substantial down payment and further air quality testing that you must pay for as mould spores can grow behind walls and become airborne years later. Yes this is an extraordinary example but it can also happen where a bidding war has bid up the price and the best offer (yours) has been accepted. The lender sends in their appraiser to determine the value of the property and it may come in at a lower value than your accepted offer and so you’d have to come up with more money for a down payment (which you weren’t prepared for or don’t have).

If you have a “subject to financing” clause in your agreement, then you have a way out and can look for another property with no issue at all. If you don’t have a “subject to financing” clause at all and you’ve already given your deposit to the realtor (because you were under the impression that you were going to be approved), then you’re out of luck and will be stressed out and scrambling to find a lender that will help you out, even though you were technically “pre-approved”.

So in summary, always put in a “subject to financing clause” as that’s the only protection you have. This is much cheaper than forfeiting your deposit (and facing potential legal action from the seller) should you want to cancel your contract after the agreement has been made.

Better yet, contact your local Dominion Lending Centres Mortgage Professional and have them do a proper pre-approval and have you fully prepared for what most likely will be the largest purchase in your life!

“Thanks to my DLC colleague Joe Cutura for this article.”