Reviewing article: "The bank said no - now what?"

Good afternoon Montreal Real Estate world. Today, I am reviewing an article that caught my eye in the National Post entitled "The bank said no - now what?" Susan Smith does a great job painting the current mortgage landscape and impact of the post-2008 Federal Government rule changes. However, I'd add a couple things. Susan Smith discusses how the rules changes have impacted certain consumers, I shall solely focus on the self-employed.

The Self Employed: Okay, here is the unplugged truth for anyone self employed. Is it really harder for self employed people to qualify for a mortgage? I'd say it depends on your specific circumstances (declaring income and credit quality are the usual suspects). According to Susan, "The government...tightened requirements for the self-employed, requiring independent validation of income statements." In other words, the Federal Government is forcing the self employed to declare more income on their income taxes. It is much harder to get a mortgage with an "A-lender" under the self employed program without declaring anything reasonable. For example, the most common insured self-employed program would be Genworth's Alt-A program. They require strong credit history, a +680 score, incomes taxes to be filed and up-to-date for 2 years, and no income tax arrears owed. Generally, when applying for a mortgage your income declared on line 150 of your notice of assessment can be multiplied by 2-2.5 of the stated income. Usually, this type of financing referred as "common sense financing." In other words, say you are a plumber or electrician declaring $45,000 personally hence we may be able to an auto-declared income under this program at $90,000 in order to qualify for your mortgage. In such cases your mortgage would incur an extra mortgage insurance premium.

As the article points out, there are alternative lender options like Home Trust or Equitable Bank that exist. Using an alternative bank the interest rate can be between approximately between 3.89-6.99% depending on the term. Rates here as understandably based on risk. The "country’s 2.75 million self-employed workers – a group that, according to Statistics Canada, has a higher median net worth than paid employees." Self employed individuals are made out to sound more risky compared than salaried individuals. The self employed must declare more income whether we like it or not. Sometimes it makes sense to work with an alternative lender for 1-3 years but with a mortgage plan you can switch to an "A -lender" thereafter depending on your circumstances. 

The article mentions private lender, I shall write a separate blog entry on that subject.  

Divorce and separation: a potential mortgage and credit nightmare for women

Hey everyone. Hope everyone's week is off to a good start. Very cool yet sunny in Montreal. This week I've been inspired to speak about women, more specifically women that go through divorce or get taken advantage of by their spouse or partner. 

In 2013, I worked on a number of divorce and separation cases. In many of those cases either the women wanted to keep the family home or took their share of the profits and bought a new home for themselves (and often the children). I highly suggest any woman in a relationship or marriage to build independent credit of their partner. I am not paranoid and yes I still believe in the institution of marriage, however should anything happen or should you experience divorce it's always important to have credit. You might not be able to keep the house or your lender options may be very limited. When in doubt ask and plan ahead. 

Example 1: Divorced with joint credit 

I have one client that has three kids, works part time and she wanted to refinance to buy her x-husband out in order to keep the house. I found an excellent mortgage program but I had to get an exception from the lender because post-divorce she was removed from all the joint debts. Luckily she had just the minimum independent credit history to qualify for this program. Quite the close call!

Example 2: Common Law & Helping the Wrong Person

A more tragic and heartbreaking situation is when someone is in a common law relationship and helping the wrong person. In this case my client was taken advantage of by her partner. My client was committed to her partner and wanted to help him with his debts and give him a cash infusion for his business. Before she knew it he took the money and left. My client's credit cards were at limit and with a salaried job she was stuck paying. Over time she got more and more behind. By the time she sold the house and paid off all debts the credit damage was already done. Presently, I started to build a case for Equifax to see if the severe lates can be removed off her report. Presently she is trying to re-start her life with her daughter by buying a new home together. With the severity of lates all "A banks and lenders" won't be able to finance an insured purchase (she does not have enough down payment to work with an alternative or B lender). I will keep everyone updated on this story.

Both examples are sad to hear but unfortunately more and more common. In example 1, my client should have created her own independent credit years ago. I recommended that she create more credit today to have the necessary credit history tomorrow. In Example 2, I wish I met her years ago just as she was starting to become late on her debts. Many consumers don’t know what to do in that situation or as they become late they go see their bank and their own bank refuses or cannot help. With the emotional drain of separation or being taken advantage of it’s hard to know what to do.

Reviewing: Mike Holmes' article "8 Tips for planning a reno in 2014"

Hey everyone. I've been blogging a lot lately about renovations. I came across an article that might be of interest to folks. The Montreal Gazette published an article written by Mike Holme's entitled "8 tips for planning a reno in 2014."

In a nutshell, here are Mikes main renovation tips:

1. Right off the bat, Mike states, "Make decisions before you start. I've said it a million times. It takes longer to plan a renovation than to do it. The more time you spend making decisions before construction starts, the less time will be spent on actual labour, which helps control costs and work schedules."
2.  Find qualified pros: Mike suggest that you not rely on friends or family for recommendations and that you get 10-20 references for any contractor. He says, don't only look at recently completed projects and to check out work sites in progress.
3. Do a background check: Here Mike suggests that you do a background check. Bad contractors change incorporations to cover their tracks. Try speaking with the Better Business Bureau.
4.  Get a detailed contract: Mike states the more detail in the contract the better. It should review and specify every task. 
5.  Set up a payment schedule tied to project milestones: He also recommends that milestones be specified and that stages be completed and inspected before moving onto the next part of the reno.
6.  Discuss changes: Every time there is a change, Mike states, this causes delay and can increase costs. Speak openly with your contractor to ensure whether the change is worth this effort and delay.
7. Know the work schedule: This includes the daily work hours of the workers. Mike states if the workers visit the work site here and there at random hours then this will throw the timeline off track.
8. Should you stay or should you go? Mike suggest that during major renovations you should move out temporarily. Living through construction is never easy especially with young children and a busy work-life schedule. If you stay in your home Mike states that the workers will also spend more time cleaning daily at your expense rather than working faster towards project completion. 

Mike's tips are excellent. Like Mike, I am a huge fan of planning ahead before starting any project. The one part that Mike doesn't mention is financing. Here it's important to know what is your budget and how will you finance the renovation. Your dream project may need to be scaled down if it cannot be financed.

You may have the money in hand which helps tremendously or you may need a mortgage. Your two options here would be: 

(A) Auto-construction financing where the bank will give you a special mortgage that disperses funds (up to five dispersals) for the contractor at various milestones in the project. Here the bank will need to approve your contractor and project plan. 

(B) Refinance and use the net proceeds towards the construction. Here you will be in charge of the all the funds at once. Here the the bank may not need to see plans and budget. In both financing scenarios, it's important to stay on budget as the bank won't give you additional funds once the mortgage is notarized. 

Should I renew my mortgage early? What's the deal?

Hope everyone is having a great last week of 2013. I recently met with a couple of clients that were looking into early mortgage renewals. I will be the first to admit if what you are being offered is a good deal or not. Canadians trust their banks way too much and it's good to be informed. I'd rather see a satisfied and informed consumer rather than just resigning blindly.

There's nothing wrong with being loyal to our banks but we assume that that after being years with them that they will always give us the best deal. Before I dive into the mortgage renewal world, here are a couple mortgage definitions to review...

A mortgage renewal is when your mortgage term comes to an end. Usually most mortgage terms can be 1-10 years. At the end of your term, you can decide to stay with your current lender or move to a new bank without penalty. Some banks will help cover the switching costs (only basic notary fees will be covered). A refinance only applies if you mortgage term expires and your looking to borrow more money, i.e. increase your original mortgage. Some people break their mortgage mid-term and incur a mortgage penalty. At your mortgage renewal typically you cannot borrow more money otherwise it's considered a refinance. Sounds silly but something people often forget.

Okay now down to the nitty gritty. A mortgage renewal can be a bit tricky. What you're being offered may not be the best deal. The banks try to re-sign their current clients as quickly as possible and they have a large customer service machine behind them doing this job. Some banks try to renew you 4 to 6 months in advance of the term ending. If you renew early either: (A) a small penalty is blended into the rate offered; or (B) the further out you renew before you term ends the higher the rate you receive. In other words the future out you reserve your renewal rate the higher it will be. The best rates in the mortgage market are typically 30-60 days out.

Here's a recent example. I met with a client who's term is ending in January 2014. I initially met with her in November 2013. What her bank was offering was not competitive. I managed to secure a mortgage for her where her evaluation and switching notary fees were covered by the lender. We often refer to such transactions as a mortgage switch.  The client tried to be proactive and inform herself what her options are. She had difficulty to surf through options and fine print. Together we dissected all her options and the mortgage is now complete and waiting for notary. The best tip I can give people is review the fine print of the mortgage offered. Also, the first offer might not be the best.

If anyone has any questions or would like to share a mortgage story feel free to email me.

Looking to sell your existing home and upgrade?

Hey everyone, hope you are all eager for an early spring. I don't mind winter but this year I'm looking forward to a nice spring and with spring in the air many of you may be thinking about selling and perhaps upgrading to a larger home. Selling and buying is not too tricky but here are a couple quick tips to keep in mind:

1. Calculate how much money you will have net should you sell (at a responsible price), minus real estate broker fees (plus taxes), minus mortgage balance and bank penalty (assuming your mortgage is not portable or not worth porting).

2. Will the net proceeds all go towards the new down payment? Can I use some of that money to lower or pay off some debt?

3. Get pre-approved for the new purchase. You can get pre-approved without actually selling or listing. This not only helps set a budget for the new purchase, it also ensures that your credit, income, and incomes taxes are in order. It's not a bad idea to do all this before before listing your home.

4. Can I make a conditional offer on a new home pending the sale of mine? Yes you can however this type of offer is not the strongest because anyone else can walk-in and make an offer without that condition. In such cases, the vendor would give you 72 hours to sell your home otherwise you lose your offer. If your new purchase is really your dream home then sometimes it makes sense to first refinance your present home so you have the down payment. Thereafter you sell and port the new mortgage to the new home later.

5. What if the notary date for the sale of my home is scheduled after my new purchase? Not a problem. In such cases bridge loans are available through the banks.