Save, Save, Save!

In the mortgage business, the following are the key factors used to determine success at getting approval on a mortgage or not:  credit, income, downpayment and net worth.  As always, the economy affects the financial industry mood.   Therefore, when the economy is unstable, like today, it determines the way lenders evaluate the factors listed above. 

One strong comment from lenders these days is if the client’s credit is not so great and the person is being given the downpayment from someone else (gifted money) the lenders see this as a weakness and may decline the mortgage application.

If you are not planning to buy for several months, get the gifted money into your account now, so when asked to prove downpayment in the future by giving your three months bank history, the lender does not see the large gifted deposit in your account. 

Of course, the best way to get the mortgage you want is to:

 Save, save, save your money!

Co-Signer vs. Guarantor

It is not unusual for clients, especially in these challenging times, to be requested by a lender to get support for the purchase of a home.  Generally what lenders ask for is a co-signer or guarantor.  These two words are different because they have separate obligations.  I have observed that when economic times are tougher, there are more requests for a co-signer than a guarantor. 

You need to know a co-signer is considered better than a guarantor because a lender typically “seeks strength in an application” using a co-signer.  Here is why:

A guarantor signs a promissory note stating that he or she will support the applicants in case of problems.

A co-signer, on the other hand, is put on title and assumes more responsibility if the applicant(s) have financial problems.

To avoid worry, the lawyer will have the co-signer as a “tenant-in-common” and assigns approximately 1% ownership.  Clearly, the applicants still own the home, but the co-signer holds responsibility as well. 

The “on title” status is what makes a co-signer more significant than a guarantor.

In the future, if/when applicants correct the problem that lead to the request for a co-signer or guarantor, only the co-signer is on title.  In the future, to remove a co-signer from title, the deed must be changed and a fee paid. 

*The above statements are not legally based but outline how lenders treat both forms of support. 

Economy & Mood

Recently I encountered a stark reality in the mortgage business.  I reviewed in June 2011, the profile of a couple who came to me for a mortgage.  Their situation was quite financially weak, which made them unable to get a mortgage approval at that time.  There was a gifted downpayment, a serious past credit issue, and generally limited credit scores. 

I suggested that they wait at least a few months before buying.  This advice was based on the advice of the lenders and the insurers who make the ultimate decision if a person can qualify or not.  Again, they first came to me in June, and this September they returned.  What they didn’t know was that the industry has changed.

The lenders and insurers moods have changed due to the economy:  Greece is near bankruptcy and unemployment has not improved in North America.  Those same lenders who were encouraging in June changed their minds and became discouraging in September.  The emotional part for me is, I based my advice on June’s predictions, when I encouraged the couple their deal might work.  Guess who is the bad guy now?

 I feel for people whose deals fall through, but thankfully, that doesn’t happen very often.  However, the mortgage industry is forever changing, and seems to be changing more rapidly every day.  This is not a good thing for people with poor credit and weak finances.

Business for Self - Simplified!

A good portion of the working public is self-employed.  I believe this will continue to be a substantial part of the population and may be even greater in years to follow.   It is a segment of our working population that was not handled very well by our financial institutions, up until the last few years. 

The insurance providers, CMHC, Genworth, and Canada Guaranty have a program called Business for Self Simplified.  There are small differences between the different insurers, but I want to speak of one common element:  The insurer requires you be self-employed for a minimum of two years. So, if and when you decide to start your own business, first go to the Chamber of Commerce and complete an application for a Business License.  You can register your personal name if you haven’t decided on your company name.  The license lasts for seven years, costs about $75.00, and provides solid proof of when you started in business.  If you don’t have a one page license, then the documentation you are required to provide is substantially harder to get.  As a self-employed person make buying a home easier.

One final note: You require great credit to qualify as well.  Get a business license, tend to your debt properly, and your chance of buying a home becomes a real possibility.

Long Term Mortgage Thinking

I do know that there is a tendency to think of a house simply as shelter. Given our annual temperature fluctuations, that is a fair comment. Problem is a house is more than shelter. It is an investment that one can add to the enjoyment of our retirement. So when you buy, I want you to think about the next five (5) years or even up to twenty-five (25) years.

When you buy, your income and today’s rate determines what you can afford. Based on these facts, let’s say you can afford to purchase a house for $180,000.00. You put five 5% down. Based on a rate of 3.89%, today your payment would be $875.71 (principle and interest). After five (5) years you could owe $168,397.27.

What happens if rates return to a number closer (to what I would call normal) 5.8%? If rates did rise to this level, your payment would be $1099.41. This is an increase of $223.62 per month. Remember property taxes also tend to rise each year. Do you think your income will support this increase? If not, then plan today to deal with this possibility. Planning for tomorrow is good. Call if you have questions.