Are we Pre-Approved? Not what you might think it means…

Many clients think that having a mortgage pre approval puts them in a position to write offers on properties without inserting a ‘condition to receiving and approving financing’ clause.

Nothing could be further from the truth.

Being ‘pre-approved’ can all too easily create a false sense of security.

Although going through the pre-approval process is itself important the actual term ‘pre-approval’ is not exactly accurate.  In fact it should at the very least 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 is although you may be pre-approved at a certain rate (which is typically held for 120 days from the date of application), not much else other than this rate has any degree of certainty.   There remain 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 imperative that one always includes a condition 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% pre-approved.  Although 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 and the Realtor, there is no 100% certainty of approval.

This would be why we always try to insist that clients include, arguably the single most important condition clause in their Offer to Purchase ‘subject to receiving and approving financing’. (I am being repetitive with this statement for a reason)

The preapproval process should be considered more of a pre-screening process than anything. It should always involve review and analysis of the client's current credit report, it should also include a list for the client of all documents that will be required in the event that an offer is written and accepted, (ideally all of those documents should be 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 as important; with the 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 pre-approvals to ‘actual mortgages is less than 10%.  It is for this reason that an actual live underwriter very rarely completely reviews a pre-approval 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. That individual will not be the same person that underwrites and approves the actual 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 application that the ‘subject to receiving and approving financing’ clause in the purchase/sale agreement is so vital.

Another significant factor which over the past four years, and in particular since Nov 1st, 2016  has undermined the solidity of a client pre-approval 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 pre-approval 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 of 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 it 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 log foundation, the list goes 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.

Take nobodies word that you are pre-approved, look for an email from your broker stating ‘File Complete’ which should arrive no later than your condition removal date ideally.
Written by Dustan Woodhouse. 

Posted and edited to reflect mortgage lending in Ontario by Steven Porter, Mortgage Agent, Mortgage Architects. Steven can be reached at 905-875-2582 or by email at Steven@1800Mortgages.ca

Understanding the tax implications of co-signing a child's mortgage

One of the most common ways a parent can help out a child is to either gift or loan them money to assist them in financing their first home. Alternatively, parents who either can’t afford to make a gift or loan, or perhaps simply don’t want to, may still be in a position to do the next best thing — guarantee the mortgage on their kid’s home.

The Canada Revenue Agency recently responded to a taxpayer inquiry involving such a loan guarantee. In the case in question, two taxpayers we will call Jack and Diane were getting a divorce and Diane wanted to buy her own home. Her parents co-signed for the mortgage so she could purchase the new home since she already owned an existing home with Jack that they were trying to sell.

Diane’s parents neither lived in the new home nor contributed any money toward the purchase of the home, nor did they pay for any of the utilities, property taxes or repairs. Diane and her parents also signed a document stating that the parents “have no financial interest in the home.” Notwithstanding all this, however, Diane’s parents hold legal title to the new home since they were required to co-sign for the mortgage.

Diane’s parents also own their own home in another city, which they have lived in for many years. Diane and her parents would like to leave their names on the title of the new home since they want to avoid paying land transfer tax to have their names removed from the property.

Diane wrote to the CRA because she wanted assurance that if she later sold the home at a profit, that gain could be sheltered by her principal residence exemption and wouldn’t be subject to capital gains tax in her parents’ hands despite her parents being on title as legal owners.

The CRA responded that according to the definition of “principal residence” in the Income Tax Act, “the property must be owned by the taxpayer at any time in the year” to qualify as a principal residence.

The Tax Act, however, doesn’t define the word “owned” so we are left with the two most common forms of ownership – legal and beneficial. In most cases, the legal owner will also be the beneficial owner. However, it is certainly possible for someone to have legal title to something, in that title is registered in their name, yet have someone else be entitled to the use and benefit of the property, known as “beneficial ownership.”

The CRA concluded that if it is truly Diane and her parents’ intention that Diane be the sole beneficial owner of the home and that her parents merely hold legal title because they were required to do so as guarantors of the mortgage, Diane, as the beneficial owner, and not her parents, would be responsible for reporting any future capital gain at the time the home is sold. This means that presumably Diane could use her principal residence exemption to avoid paying tax on any future gain at the time of sale.
by Jamie Golombek, business.financialpost


- Posted by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

Canadian Financial Institution Regulator Further Tightens Mortgage Lending Rules

OSFI (Office of the Superintendent for Financial Institutions) has published its update for the tightening of mortgage lending regulations known as Guideline B-20 and set the date for January 1, 2018 that it will apply.

The revised Residential Mortgage Underwriting Practices and Procedures will include several key changes that the regulator says is part of its expectation that federally-regulated mortgage lenders remain vigilant in their underwriting practices:

-Stress test - the minimum qualifying rate will now include uninsured mortgages and is to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

-Enhanced LTV (Loan to Value) measurement - federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.

-Restriction of certain lending arrangements - federally regulated financial institutions prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.

Mortgage industry experts expect that, following a brief run-up in activity fueled by buyers rushing to lock-in existing qualifying criteria, the change will have a dampening impact on the housing market shortly after it comes into effect in January. It has the potential initially to rock the market because non-insured mortgages represent a large share of the mortgage market.

Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and retired, real estate broker with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca

The hidden trap of mortgage penalties

It's easy to get caught in the posted mortgage rate trap at the big banks.
No, you won't have to pay the posted rate on your next mortgage. Pretty much nobody does that any more, according to mortgage planner Robert McLister. The real danger is that posted rates will be used to calculate the penalty if you ever have to break your mortgage, probably costing you thousands of extra dollars.

A mortgage penalty compensates a lender for the interest payments it loses out on when you break a mortgage contract. "That's the intention," said Mr. McLister, who is also former editor of Canadian Mortgage Trends. "But in many cases, it overcompensates. It's punitive in many cases."

As we head into another round of quarterly bank earnings reports, it's worth thinking for a moment about how those wonderful profits and dividends for investors are generated. One way is by using posted instead of lower discounted rates when calculating how much to penalize a client breaking a mortgage.

With houses as expensive as they are today, it's crucial to get the lowest mortgage rate you can. Keep the same level of focus when inquiring about mortgage penalties. Although it's hard to imagine the need to break a mortgage on a house you're just buying or living in happily, it can happen. Mr. McLister said roughly 70 per cent of people adjust their five-year fixed rate mortgage before maturity, although many do it to refinance or move to a bigger house rather than to break the mortgage outright.

Mortgage penalties are straightforward if you have a variable-rate mortgage – expect to pay the equivalent of three months' interest in most cases. With a fixed-rate mortgage, the penalty is set at the higher of three months' interest or a calculation called the interest rate differential, or IRD. The must-ask question when negotiating a fixed-rate mortgage: Do you use discounted or posted rates to calculate these penalties?
This is important because using posted rates can result in a much higher penalty. For some real world numbers, let's use the mortgage prepayment calculators all lenders now provide on their websites. They show penalties for paying all or a portion of your remaining mortgage balance (to find them, Google your lender's name and "mortgage prepayment calculator").

Let's use an example of someone who, three years ago, set up a $250,000 five-year mortgage and has a balance owning of $200,000. Assuming an original mortgage rate of 3.64 per cent with a discount of 1.5 percentage points, the mortgage prepayment calculators at several big banks showed penalties ranging from $5,000 to $7,600 or so.
A check with some alternative lenders found penalties ranging from $1,800 to $2,800. These are very rough comparisons because lenders differ a fair bit in what information they ask you to supply. But you get the picture – the big banks apply penalties with a sledgehammer.

As well as producing revenue for lenders, inflated mortgage penalties also help trap clients who might otherwise move their business to another lender. Imagine you want to refinance your mortgage or buy a bigger home and your bank won't come across with a competitive rate. You say you'll change banks, only to find out how prohibitively expensive it is to break your mortgage.

Mr. McLister said some banks have a stated policy of offering clients only a small discount off the posted rate if they want to add on to their mortgage to buy a more expensive house. You may be able to negotiate something better than a trivial discount, but your bank knows your leverage is limited because of the penalty you face if you go.
Alternative lenders often have better rates than the big banks, and they typically have cheaper penalty fees. Why do so many people use their banks for mortgages, then?
Mr. McLister speculated that some borrowers like the convenience of having their mortgage where they bank, and of being able to go into a branch to talk about their mortgage. If you prefer transacting online, some alternative lenders don't have great websites.

One thing you do not need to worry about if you borrow from an alternative financial institution is that your lender will go bankrupt. "It's funny that people look at mortgages and think, I need a safe lender." Mr. McLister said. "If a lender goes out of business, pretty much nothing is going to change except for the name of your new lender."

By Rob Carrick – Globe and Mail


Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and real estate broker/consultant with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven@1800Mortages.ca or online at 1800Mortgages.ca