Posts

First Time Homebuyers Mortgage DON’T Tips

First time home buyers tips help you to be prepared before closing but as importantly, AFTER you are pre-approved for a mortgage. In fact, buyers ruin their chances of closing by making simple mistakes once they hear the word “approval” from the mortgage broker. These are some of the most common mistakes people make and most importantly explain what NOT to do as the best First Time Homebuyers Mortgage Tips.

Do Not Start a New Job (please!)

While it is not the most important item for getting a pre-approval, job history and length of time at your present employer is vital to getting approved as a First Time Homebuyer.

If you have been at your current job for more than 2 years, wait until the mortgage is closed before choosing to switch to another company.

Do NOT Purchase a New(er) Car (I beg you!!)

It is so easy to understand the temptation to buy a vehicle after getting a mortgage pre-approval. Most people are a bit nervous and are filled with excitement when they learn they are pre-approved.  If their credit and income are good enough to buy a house, then surely it is good enough to get a great deal on a car, right?

The pre-approval issued by the lender was determined by the current level of debt and income at the moment the person applied for the home loan.

It is best to wait until the loan has closed before trading up on your vehicle.

Do NOT Make a Late Payment on ANY Existing Debt

As previously stated, the pre-approval is determined by a snapshot of your credit at a particular point in time. The track record that you have is documented by the credit report used for your approval. The majority of lenders will request a new credit report for you approximately one or two days before the loan closing. Any late payment that shows up could be a red flag to the lender and cause them to turn down the loan.

So, to be safe, make all payments on time while waiting for the lender to finalize your loan.

Avoid Any Unusually Large Deposits

The best First Time Homebuyers Mortgage Tip is that your credit report shows a track record of your payments over time, your bank account also has a track record. The mortgage underwriter will review your checking and savings account to see if there are any larger-than-normal deposits in the months leading up to the purchase. Avoid any large deposits that do not coincide with your normal banking habits.

Do NOT Open a New Bank Account

We previously mentioned that you should not switch jobs or add any new debt. The theme is consistency and this point fits within that theme.

Whether you have used your current bank for 6 months or 6 years, it is best to stick with that bank until the loan closes. Opening up a new account creates questions among mortgage lenders. They wonder if you are trying to hide funds in one account or if you have unrecorded debt obligations that are going to be facilitated with the new account.

Do NOT Spend your for Down Payment or Closing Costs (no Vegas trips…)

Buying a home can be exciting but also stressful. Getting the utilities switched to a new address, changing the address and hiring the movers can all take time and some funds. While you may have saved up a nice nest egg to prepare for the home purchase, don’t spend all of that money.

The estimate provided to you for the closing is just an estimate. Things like property taxes, homeowner’s insurance, and other costs can creep up and cost a bit more than anticipated. 

Do NOT Close Out Any Debt Account (First Time Homebuyer 101 tip)

It is usually a good idea to pay down debt and close the account, whether it is a credit card, furniture account or local store account. Keeping your debt as is until the mortgage closes, is key here.

Closing out a credit card, for example, may lower your credit score. Remember the pre-approval is a snapshot in time. Keep the picture the SAME as at application time.

The bottom line, leave all accounts open for the time being.

Do NOT Agree to Co-Sign on a New Loan

As mentioned in the First Time Homebuyers Mortgage Tips, borrowers should avoid any new debt, especially in the form of buying a new car. This is also true for other new debt such as new credit cards, new furniture accounts or an unsecured loan. This is especially true for being a co-signor on a loan.

If your mortgage broker told you that you were approved for a mortgage, do not co-sign for a friend or relative. Becoming a co-signer makes you 100% responsible for the new debt, regardless of the good intentions of your friend or relative. This one area is a big no-no for potential homebuyers.

Do NOT Ignore Requests from Your Broker ;)

Think of a lender as a person very similar to you, they are merely trying to do their job. In this case, their job is to help you the First Time Homebuyer.

Sometimes a mortgage underwriter will ask for very specific things. It is not uncommon for an underwriter to request documentation supporting a sale of a car, major change in job or explanation for one missed payment from 14-36 months ago!

If your broker contacts you and asks for some type of document or explanation, be prompt and thorough in providing the answer. Your entire loan could hinge upon this one item and you don’t want to get rejected because you could not find the time to respond to the lender’s inquiry.

Summing Up What Not To Do Before Closing on a House a First Time Homebuyers Mortgage
After you have received your mortgage pre-approval, continue on with your life as if nothing has changed. Keep making payments on time, don’t close out any accounts and don’t add any new debt. Along with the other suggestions above, this should keep you prepared and ready for closing day and a master at First Time Homebuyers Mortgage Tips.

Getting Over the Down Payment Hump

One of the largest barriers to entry into home ownership is saving enough cash for a down payment. Small every day expenses add up; and depending on the market you live in, rent may also be eating a significant portion of your income each month. You do have options; here are some ways you may be able to obtain the funds to put towards a home:

 

Save – Simple. Utilizing a Tax Free Savings Account, determine an amount to save each month that you believe is reasonable yet substantial enough to get you to your down payment goal. Set up automatic transfer into that accounts that line up with payday and bills.

Extra Income – Ever consider a side hustle or second job. Put 100% of this cash flow into your down payment.

Home Buyers Plan – Have money in your RRSP account? The Federal government will allow you to pull up to $35,000 from your RRSP account. Note, you have 15 years to return the funds back into your RRSP account.

Sell and Asset – If you have a valuable asset your willing to give up, sell it! Just make sure to establish a clear paper trail; get a receipt or signed bill of sale to legitimize the source of funds.

The Bank of Mom and Dad – This may or may not be possible. Parent may have built up some equity in their home they can access with a secured line of credit. If this is a gift, a signed gift letter stating so will be needed. If it is to be replayed, the payment must be included in your debt ratios used to qualify.

Refinance Plus Improvement Mortgage

A refinance plus improvements can help you finally complete those home renovations you have always wanted to do! A conventional refinance enables a homeowner to borrow up to 80% of the fair market value of their home.

So, the equity a homeowner can access would be the difference between 80% of market value and the amount they currently owe outstanding on their current mortgage. This equity can be used for improvement on the home. But what if you go out and get estimates for the total cost of the project from a contractor and this isn’t quite enough money for the renovation project?

Well, these improvements also have the added bonus of potentially increasing the value of the home! A Refinance Plus Improvements Mortgage considers the post renovation (higher) value of the home, and allows a homeowner to borrow up to 80% of this increased home value.

Get your hard hats ready, and start renovating today!

Summary – 2019 Federal Budget

The Federal Government announced their official 2019 budget and affordable housing was certainly a high priority topic.

First, the Canada Mortgage and Housing Corporation (CMHC) First Time Home Buyers Incentive Plan could give first time homebuyers the option to share the cost of purchasing a home with CMHC. This would be done through funding/equity sharing that would cover a portion of the purchase price. For existing homes, up to 5% of the purchase price; for newly constructed homes up to 10%.

In order to quality for these benefits, borrowers must not have a total household income over $120,000. Further, borrower cannot borrow more than 4 times their annual household income. So, if your total household income were $100,000, then the maximum mortgage amount you could obtain would be $400,000.

Secondly, a Home Buyers Plan RRSP Increase from $25,000 to $35,000 for an RRSP withdrawal.

For now, these had been no official statement relating to adjustments to the B-20 Stress Test.

Don’t Forget About Closing Costs

You have saved enough for a down payment, found your perfect home, negotiated the purchase price and made an offer subject to financing, and have now gotten approved! You’re all set, the hard part is done, right? Not in reality, there are quite few other fees that need to be considered – closing costs.

Closing costs are often hidden and often overlooked one time expenses due on the completion date. A rule of thumb is to budget 1.5% to 4% of the purchase price to cover closing costs. However, other factor such as taxes, the type of home, or if it’s a new build can impact the amount you need to account.

Some fees that you are fairly guarantee to face:

  • Legal Fees: Your lawyer will explain all of the paperwork and make sure what you are signing is binding, legitimate, and all items agreed to have been met. In addition, you are liable to repay the lawyer for any searches, registrations, and incidentals – all due on the closing day.
  • Title Insurance: Most lenders will require title insurance as a condition to their mortgage, which protects from fraud, identity theft and forgery, municipal work orders, zoning violations and other property defects.
  • Fire/Home Insurance: Lenders also require fire/home insurance in place by the time of purchase completion, which covers replacement cost of the home.
  • Adjustments: When possession takes place mid month, and the seller has already paid fees such as taxes, utilities, and strata. So, the amount you owe is based on the portion of that month you will have possession and prorated on the date of completion.
  • Property Transfer Tax: First time home buyers are exempt if purchasing property under $500,000 and all home buyers are exempt if they are purchasing new property under $750,000. Property Transfer Tax is calculated as 1% on the first $200,000, 2% over $200,000 and 3% on any value over $2,000,000.
  • GST: Is not charged if someone has previously lived in the home, but charged on all new home purchases.

This list is not extensive, as each purchase has its own set of costs. As your broker, I make sure to explain each one and assure you are fiscally prepared.

 

 

Assessments and Appraisals

The value on an assessment notice may vary quite a bit from a mortgage or real estate appraisal. One reason for this may be the timing that the assessment was done; versus the appraisal just done reflecting the most recent value based on the current market conditions.

Home Appraisal

An appraisal provides you with a document outlining an estimate of a property’s current fair market value. Since an appraisal and an assessment are not definitively connected, most lenders will require as a condition, that an up to date appraisal be performed. Lenders use this valuation to base the size of mortgage they are comfortable lending.

Appraisers are highly regulated and provide unbiased valuations who take into consideration the property, home, location, conditions and many other external factors such as nearby amenities and access to public transportation. Some lenders will provide a list of approved appraisers they accept.

It is most often the borrower that is responsible for the cost of the appraisal, which upon completion will be sent directly to the lender. The lender is getting assurance that they are making a good investment for the value of the subject property.

Even though the borrower has paid for the appraisal, they are often now allowed to look at the report –although usually a consolidated version – until after closing. The appraiser performs the report following the parameters defined by the lender. It is the choice of the lender to allow the borrower he see the report. Reason for this strict access on the lenders part is to avoid the borrower taking the report to multiple lenders in search of the best deal.

Some lender may offer to refund the cost of appraisal after funding your mortgage.

Preparing for an Appraisal

  • Appraisals do include pictures of the exterior and interior of a property, so clean up and consider the curb appeal of your property.
  • Make sure to note all upgrades that you have done and the costs associated to assure they are not overlooked.

Look for any small repairs that may affect the value and make repairs before the appraisal is done; it is likely that the appraiser could over estimate the cost, thus having a significant effect on your value.

Downpayments

Depending on how much you have saved and whether you are being supported with a gift from the bank of mom and dad, what you are able to put towards a down payment will vary. In Canada, the minimum down payment is 5% of the purchase price, however there are also benefits to putting down over 20%.

Before the creation of the Canadian Mortgage and Housing Corporation (CMHC), the minimum, 20% down was a major barrier to many Canadians wanting to purchase a home. To combat this barrier and encourage home ownership, CMHC began offering mortgage default insurance; if you default on your payments, they will reimburse the lender. They charge an insurance premium on mortgages offer by lenders with smaller down payment and lower interest rates. This premium, of course, covers any losses they may incur if a mortgage default does occur.

So, why put down a larger down payment? Your mortgage amount will be less, payments smaller, and less interest paid over the life of your mortgage. With a down payment over 20%, you will save money by not having to pay any mortgage insurance premiums. Between 5% and 20%, the more money down, the lower the insurance premium.

It is also important to make sure to account for closing and other unexpected costs, so completely draining your savings towards a down payment is not the best course of action.

Bank vs Credit Union Lenders

Both banks and Credit Unions are financial institutions that have similar financial offerings; however what they can offer in term s of mortgages are quite different. Banks are publicly listed and regulated by the federal government. Credit Unions on the other hand, are locally based organizations regulated by provincial government.

Because Credit unions are not regulated the federal Office of the Superintendent of Financial Institutions, they are often not subject to the mortgage lending rules. Of course, Credit Unions do not come without any downside; as a result of their provincially based operations, they do not offer the ability to port a mortgage to a different province. Further, more qualification and lending flexibility may come at a price of higher interest rates.

It is important to consider your unique situation and needs and weight the pros and cons when comparing lenders.

Self Employed? Get Approved!

As a self-employed individual, taking advantage of write-offs that allow your income to be in a lower tax bracket may seem great. However, this may also hurt your ability to qualify for a mortgage. Lenders generally require two year of Tax Returns; two years Notice of Assessment; two years Financial Statement; statement of bank account activity; and investment income statement. Of note for those self-employed, Tax Returns will show a lower number than actual income, thus hindering them from qualifying based on income necessary to service the mortgage.

Our advice:

Think ahead. Two year prior to seeking a mortgage, make fewer write offs, and work to get your personal taxable income to a larger number.

Work with a certifies accountant, lender will be more inclined to consider financials prepared and submitted by a professional that will consider you financial goals of getting a mortgage.

If you want a mortgage sooner rather than later and haven’t planned for this when filing your taxes, you can use Stated Income so long as you have been in the same profession for at least two years before becoming self-employed. More documents will be required, including bank statements that prove consistent income.

Lastly, you may have to consider a B lender. B lenders will be more flexible in considering your income. Of course, this does come at a cost of a higher interest rate. But, once you have had time to increase your taxable income, in a few years, you may be able move to the A lender space.

What’s in a Good or Bad Credit Score

For many clients in the pre-approval process, their credit report and credit scores are a source of stress and mystery. Even with the endless information available at the click of a mouse, there seems to be no straightforward summary on what doesn’t and doesn’t affect them.

So, what determines a good (or bad) credit score?

Good Credit

From the time you get your very first credit card, your credit is being built. Keep in mind these relatively simple habits to develop that will ensure you achieve a desirable high number.

  • Pay your credit cards and all bills on time –including your cell phone and Internet!
  • Pay your parking tickets on time – that’s right, unpaid tickets will affect your credit score.
  • It’s ok to have more than one credit card, but keep it under control. The key is to not be continuously using your limits to the max! A good rule of thumb is keeping utilization under 30% of your available credit.

Myths

It is a common misconception that once a credit account is closed, you are no longer liable to pay; maybe the refusal to pay is rooted in principal, perhaps from a dispute with the cable company over a late charge. No matter the reason, once the creditor has reported the missing payment, you score goes down for 120 or until the creditor closes the account. But it doesn’t end there; they may send your account to a collection agency that will then add their own feels. The worst part, you now owe more money! The longer this goes on, the worst of an effect it has on your credit and the more difficult it becomes to recover you score.

You may have also heard that your credit score falls every time it’s checked. This is not necessarily true. Sites like Credit Karma allow you to check your score as many times as you like without damaging your score – although theses score may not be exactly what the credit bureau holds, they are certainly a good indication.

What DOES affect your score is a lender or creditor looking into your credit report. The more times lenders check (especially in a short period of time), the greater chance your score is going to decrease.

The Benefit of Using a Broker

To address that last point; many mortgage shoppers will have their credit pull multiple times within a short time frame when shopping around at various lenders (who each look into their credit report).

A huge benefit to using a broker is we will only check your credit once! Of course, that certainly doesn’t limit our reach; we have access to all sorts of lenders and the in depth knowledge of each lenders criteria for qualification, so we can find the perfect one that meets all your needs!