New mortgage rules are in effect as of December 1, 2016 and you will need a mortgage broker to navigate through the maze of mortgages
Toronto's real estate spring market is about to get started or some might argue it has already begun with a semi-detached in The Junction selling for $210,000 over asking with 32 offers, yes 32 offers! The spring real estate market is the hot season where most transactions are made since many buy in the spring with closings in the summer before schools start in September. One thing you will hear many times from real estate agents, mortgage brokers and bankers is "Get Pre-Approved". I dislike mortgage pre-approvals for the following reasons:
1. Pre-Approvals Underwriting
Pre-approvals are underwritten conservatively relative to an actual deal. The Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) requirement for pre-approvals is 32/40, however real deals can go up to 39/44. This means a pre-approval purchase value will be lower than what a buyer can qualify for.
2. Interest Rate Variations
This is where things get really tricky. Some lenders add a premium (safety buffer) to pre-approvals, typically 0.1%, since they do not know the exact cost of funding off the bond market until there is a deal with a closing date. Furthermore, lenders have different rates based on:
- Closings within 30 days, 45 days or 120 days
- Deals that are insured (less than 20% downpayment)
- Features built into the mortgage (fully loaded vs no frills mortgage)
- Occupancy of property: owner occupied or rental
- Some lenders won't do pre-approvals
What I do with all my buyer clients is get them pre-qualified per the following steps:
- Complete financial analysis and mortgage application
- Establish a monthly cash flow budget
- Get a rate hold in a rising interest rate environment
- When they see a property they want to put an offer on, I complete the mortgage qualification analysis based on the property details to establish a maximum price for a bidding war scenario
The fourth step is critical since my clients are emotionally ready to walk away from a property after they have established the maximum price they are willing to pay. So far, they have been quite successful.
In conclusion, pre-approvals are nothing more than a rate hold which is a good thing to obtain in a rising interest rate environment which doesn't look like is happening anytime soon.
If you are looking to dive into Toronto's hot real estate market and win a bidding war, please contact Nawar.
I have had cases of angry clients expressing their frustration of being pre-approved by a bank but couldn't get a mortgage when an offer to purchase a property was accepted. Have you ever been pre-approved by a bank only to find out when you have put an offer you don't qualify for a mortgage?Before I explain the difference of mortgage pre-approval and qualification, it is good to understand how lenders determine if someone qualifies for a mortgage. There are 3 legs to the mortgage qualification stool:
- Applicant's income
- Applicant's credit score and history
Depending on the type of employment (self employed, hourly, salaried, salaried with annual bonus), the underwriting guidelines vary.
A pre-approval can be turned around in literally a few minutes. Getting a pre-approval is as simple as telling the bank your income and pulling your credit bureau. As you can see from the above points, income and property details require further analysis to approve the applicant.
Furthermore, lenders do not issue a pre-approval for buying an investment property, recreational properties such as cottages, mixed use commercial properties (storefront with apartments on top) or multi-unit rental properties. It is important to state the purpose of the pre-approval when applying with your mortgage broker or bank.
Being qualified upfront requires thorough analysis of the income, credit score & history and lenders' requirements based on the type of property the applicant is considering to purchase. Here are 2 examples:
1. Buying An Investment Property
As you know by now, lenders don't issue pre-approvals for buying an investment property. In this case the applicant will undergo full analysis taking into consideration:
- Downpayment requirement for an investment property whether the funds are available or borrowed. If borrowed, the additional debt is taken into account for debt servicing calculations
- Rental income calculations: different lenders calculate rental income differently, some are more conservative than others
2. Buying A Home
Cases where the applicant's employment might be best described as one of the following:
- Started their own business within the last 2 years
- Started a new job on contract
- Have been working an hourly job for less than 2 years
- Work in the service industry where tips are not included on their T4s
- Work multiple part time jobs
- Work full time and has a part time/second job
- Business owner who pays him/herself minimal income
As you can see, not all Canadians work 9 to 5 as salaried employees. Our economy is diverse and one size does not fit all.
I hope you can understand why I ask lots of questions when I'm told "I'm pre-approved"; to ensure you qualify for a mortgage and there aren't any last minute surprises.