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Co-Signers and Guarantors – Definitions and Risks

Tuesday, September 21st, 2010

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. Today I want to talk about co signers and guarantors, and what the risks are, and what you face as a co signer or as a guarantor, and really what all this stuff means. Now usually somebody is not required to get a co signer or guarantor unless they cannot qualify for a mortgage or a car or whatever it is on their own. Now a co signer or guarantor are two different terms, but generally in the industry they’re used interchangeably.

So when someone says a co signor or guarantor, what they typically mean is one person’s name is on title who’s buying the home and another person is going not on title but on the mortgage. It’s not possible to be on title but not on the mortgage. That isn’t allowed. The mortgage lender will say whoever is on title has to be on the mortgage. But not everybody on the mortgage has to be on title.

That’s important. If one family member’s a first time home buyer and they want to preserve their first time home buyer rights, this is where we use it, or when one person is a parent and they’re just helping their child buy a home.
So in these circumstances, what are the risks of a co signer/guarantor? Well, you end up having to get independent legal advice when you close on the mortgage as the co signer. So the co signer will go in with the mortgagor to purchase the property or to refinance or whatever they’re doing, and they’ll immediately have to go get something signed from another lawyer, a different lawyer at a different firm, that says they were given independent legal advice.
The reason is they become jointly and separately liable, meaning that not only are the co signers’ incomes at risk for them to be sued for garnishments, but any other assets they have can be chased down by the lender.

Now in practice, this doesn’t really happen. It’s very rare that a lender has to go to that extent to chase a co signer down, typically because co signers are co signers because they add strength to a deal. They should have the cash resources to bail out the person they’re co signing for in the first place. That’s why the bank got them there.

So why does somebody need a co signer? Oftentimes, it’s lack of job stability, lack of job history, a new job. Typically, it’s income. It can be because they have poor credit, or maybe their credit situation is just dicey because of a divorce or a lost job or illness or what have you, and they need a co signer.
Now in those circumstances, co signers, be aware that you are not just signing on that mortgage. Your risk is not limited to just that mortgage. It extends beyond that. Now if you need actual advice on how far the lenders can go, I advise you to speak to a lawyer.

But my advice in this case is be very careful who you’re co signing for. Typically, I only see it amongst family: mom and dads co signing for children, a brother co signing for another brother. The reason is friends don’t like to do it because it limits what they can do in the future.

If I qualify myself for, let’s say, a $500,000 mortgage, and my friend is buying a $200,000 condo and I co sign for him, my purchasing power is reduced by that $200,000. If I want to go buy a $500,000 home, I can’t. So before you go and co sign, speak with me, and I can let you know how much your co signing is going to reduce your purchasing power going forward.

You’re obligated to disclose that you’re a co signer on another mortgage, even if the bank isn’t aware of it, in most cases they will be, however, especially if you’re co signing on a loan with CMHC, Genworth, or Canada Guaranty.
So before you co sign, please speak to me or get legal advice. I can at least advise you on how the limitation of getting this new mortgage debt in your name as well is going to affect you going forward.

Maybe it’s a temporary thing, and we can get you off the co signing of the mortgage at the end of the term, maybe after one year, depending on the situation of the actual applicant.

For the Mortgage Centre, I’m Rowan Smith.

IRD Penalties – Mortgage Penalties in Canada – Interest Rate Differential

Sunday, September 19th, 2010

Transcript of Video Blog:

Hi, everybody. Rowan Smith with the Mortgage Centre. Today’s topic is going to be interest rate differential penalties and payout penalties. Now most mortgages in Canada, when you pay them out and break the term, there’s going to be a penalty.

If you’re in a variable-rate mortgage, chances are it’s only three months’ interest, but how penalties are calculated on fixed rates varies from institution to institution. It typically is the greater of three months’ interest or the interest rate differential.

Now they’re obligated to disclose this to you when you get the mortgage. What they’re not obligated to disclose to you upfront is exactly how that interest rate differential is calculated.

A lot of people are getting shocked when they see the new lower rates today, they want to take advantage of them, they want to pay out their existing mortgage for the new lower rates, and then they find out that by doing this they’re going to be facing an absolutely enormous penalty, because again, it’s the greater of three months’ interest or the interest rate differential.

The interest rate differential is a bit of a formula that looks at how many months are remaining in the term, the amount of interest you were paying now, what the bank could get on similar terms of money remaining that you have today, and they do some sort of a calculation.

It varies from institution to institution on what rate they compare they could get versus what you’re paying and all this type of thing, so it’s very important to ask your institution and go over this in advance.

Now a lot of people facing these penalties throw up their hands and say, “Well, I was never informed of this” and actually, they are. Most cases, in fact, all of them, they would have had to sign off on this at the lawyer’s office. There’s no way you could have gotten a mortgage without having being disclosed at some point that there was an interest rate differential calculation in there.

Now you may not remember it, and in fact, the person you were dealing with may not have explained it to you very well. This is where the onus is on the borrower to make sure they’re informed on what they’re doing, but also on the broker, if they’re dealing with a mortgage broker, to explain to them the situation and to explain to them how the penalties are calculated.

This became real clear to me, because I do most of my mortgage reading in the gym while I’m on the treadmill. I came across an article today which I’m going to actually bore you with by reading just a very, very brief snippet of it so that you can see exactly how this was ruled by a governing body.

“A borrower complained that they paid an interest rate differential penalty substantially higher than that projected by the mortgage agent. The ethics committee chair concluded that the borrowers were aware of the higher penalty for at least 24 hours before they went ahead with the new mortgage and paid out the old one using the interest rate differential.

The chair noted that the borrowers were not compelled to pay out the mortgage, but they chose to do so. As a result, he concluded that the payment of the higher IRD was a result of the borrower’s actions and not the members, not the broker and ruled that there was no violation of the code of ethics. The complaint was dismissed.”

So in this case, the chair felt that the borrower had been disclosed how the penalty would be calculated. Because the lender had not compelled them or forced them to take this payout, probably because they were trying to get the lower rates, which is understandable, they didn’t hold the broker or lender …they don’t make it clear if it was a broker or a big bank that was involved in this complaint was not held responsible.

So the bottom line for this blog post today is know what your penalty is before you sign those mortgage documents at the lawyer’s office. If you’re one of my clients, I always cover off how these penalties are going to be calculated and what you can face.

But please, ask the questions if you don’t know, because saying that you weren’t informed later won’t be possible given that it is contained in all mortgage documents you sign at the lawyer’s office.

For the Mortgage Centre, I’m Rowan Smith.

Stated Income – Self Employed Mortgage Borrowers

Friday, September 17th, 2010

Transcript of Video Blog:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. I’ve had several calls this week that have all dealt with stated income programs, people saying, “How come I can’t use stated income?”.

Let me explain what stated income is. Stated income is a program that was designed for self-employed and fully commissioned people who have a difficult time confirming their income through traditional standards. That’s right off of the box, as it were.

What that really means is self-employed people that earn cash under the table doing jobs, contract jobs, or maybe their income’s difficult to prove because they have a lot of write-offs such as use of home, capital cost allowance and depreciation, all of these situations. So if you know somebody who’s self-employed and says they can’t get a mortgage, we could look at using a stated income mortgage application.

Now having said that, stated income does not mean fabricated income. There has to be an element of reasonability here. If someone says they make $90,000 a year as a hair salon owner, that’s reasonable if we can show that they in fact have gross revenues that exceed that.

We don’t want to see somebody who files $10,000 of taxes but tells me they make $100,000. Something doesn’t add up with that. I wouldn’t want to lend them money on that if I was a lender, and I don’t expect that they should.

So if you know someone who’s trying to state an unreasonable amount of income, don’t bother wasting your time with it. It’s not going to get done. It has to be reasonable, and it has to be based on their actual earnings, something that’s verifiable but perhaps not fully taxable because of various number of reasons.

Let me give you an example where someone with stated income made perfect sense. I dealt with a very wealthy individual who owns multiple corporations. He pays himself from T4s from various corporations in his personal name. His personal name only shows $60,000 a year, but he makes about $600,000 a year of income.

This is a classic case where stated income made perfect sense for us to use it. He can document through his financial statements that he’s making millions of dollars of revenue, but he’s only pulling out in his personal name a certain amount.

Now that’s because his companies are in fact paying his mortgage. That doesn’t mean he’s not earning the money; it just means that from an accounting standpoint it’s difficult to document.

So, stated income: it’s a great program out there, but it only applies to people that legitimately have the earnings but can’t document it one way or the other.

You can expect that crystal-clean credit is going to be required for stated income. It’s not going to be available for someone that’s had a lot of problems. At least it may be available, but not at fully discounted rates.

So if anyone in those situations that I’ve described thinks they could use a helping hand, I’m Rowan Smith from the Mortgage Centre.

Down Payment Rules – Source and Seasoning – Document Requirements

Thursday, September 16th, 2010

Transcript of Video Blog:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. I’m going to rehash some old material because I keep running into problems with it recently.

It regards the down payment. When you’re buying a home, people often think, “Well, I’ve got the down payment, so now I just have to qualify for the mortgage”. But the source of that down payment is oftentimes as important as the source of your income.

Now let me give you a couple examples of things that are acceptable. If a bank sees that you’ve recently sold a property, when you sell it you’re going to be given, from your lawyer or notary that represents you, a statement of adjustments and an order to pay.

This is a document that breaks down where all the funds went: some went to pay out your bank, some went to pay out legal costs, etc., and then the balance will be payable to you.

So let’s say you had $100,000 left over. Now you went and bought another place, and you wanted to put $100,000 down. Well, that’s perfect. It’s a very clear track record that the dollars were yours in your name. They weren’t borrowed, and they weren’t from any proceeds of crime. That’s really what the banks are going to be looking at.

Now another thing that would be acceptable would be bank statements showing the accumulation of funds over time, showing at least 90 days, and 90 days is the industry average. You’re going to be asked for this anywhere you go.

Now if you’re dealing with your own bank, they may not ask you for it, but it’s because they can actually see it on your account themselves. Rest assured, they will be looking for a 90-day history of your down payment to see where it comes from.

There are a couple of institutions out there that make exceptions depending on specific programs, but by and large, 90 days’ bank statements.

Now if you’ve got more money stored in ING and some other money at TD Canada Trust, some at CIBC, and you decide you’re going to shift it all into one account and then you go and do your mortgage application, you’ve made a lot of work for yourself because you’re going to have to get 90 days’ bank statements for all three of those accounts and for whichever account you put it into showing the funds going there.

The banks need 90 days, and they’re going to chase you to see all that flow of funds to account for your down payment.

Now you may be thinking to yourself, “Well, listen. The bank’s got the money. The down payment’s there. What do they care?” They care because the source of your down payment could create contingent liabilities that aren’t really registered on the title.

What I mean is let’s say that a husband and wife, newly married, get some money from the dad of the girl that got married, and then a year from now, everything spins out of control and they end up getting divorced.

Well, technical that money should be split down the middle and go separately. But it really was a gift from the father to the daughter, so perhaps even the husband and wife are OK with that. But it doesn’t clear up the fact that there’s this murkiness as to where those funds came from.

Another issue is if you borrow the down payment. People will come to me and say, “Well, I don’t have any savings, but I’ve got a $20,000 Visa.”

I’m like, “OK, well, you need $10,000 of down payment because you’re buying a $200, 000 home. So you need five percent.”

They say, “OK, I could take $10,000 off of there.”

I say, “Well, wait. This could present a problem. The reason it could be presenting a problem is because now you have to qualify for the mortgage and the credit card debt.”

Credit card debt they look at, and they assume you have to pay three percent of the balance. So on $10,000, that’s $300 a month that they’re looking at. Well, that reduces what you qualify for on the mortgage side by about $70,000 at today’s rates.

So is it cheaper for you to just pay a slightly higher rate and get a cash-back mortgage, or is it cheaper for you to pay the lowest possible rate and borrow some money maybe at 18 percent off your credit card?

Sure, everybody has the best of intentions and they think they can pay that portion back. But oftentimes that isn’t the case, and they end up holding that credit card debt and just rotating it and paying it and paying it on the long-term basis, which isn’t a great plan.

That’s not what the banks want to see. They don’t want to see no accumulation of the savings. They want to see savings behavior.

Again, you’re going to be asked for 90 days’ bank statements. You’re going to be asked to prove that it is your money, that it is not borrowed, and if it is borrowed, we have to factor that payment in.

If it is borrowed from some other source, we’re going to have to factor some sort of a payment in and prove that you’re going to be repaying these dollars.

So don’t think that you can just get a loan from your friend and a loan from your brother and that you’ll repay it back in the years down the road when you sell the property. That won’t really fly.

Now I can work with you to try to find the best way to do this, though. There are exceptions to some of these rules that I’ve explained.

But by and large, you have to leave that up to the professionals who work the with banks, because we know each individual bank, and we know which ones are stickier on this than others, and some that can make exceptions, and some that look at it a little more common sense.

If you’re in that situation, if you’re having trouble with a down payment, call me. It’s Rowan Smith from the Mortgage Centre.

High Fees on Bank Mortgages? Talk to Me!

Tuesday, September 14th, 2010

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. I want to talk today about rates and fees. I heard something that was very disturbing to me again. I heard a broker that was charging a very large fee to arrange a mortgage for a borrower through a bank. Now I’m going to explain how our industry works, and perhaps to the dismay of some agents out there.

We are compensated when we sell a mortgage by the bank. Now this is assuming that this is a bank mortgage. If this is a private mortgage or something arranged through a mortgage investment corporation or subprime lender, we may not be getting paid anything. In those cases, you will pay a fee.

But if you’re looking at an institution that is charging cut rates, like rock bottom rates, has the names like TD, CIBC, Scottish bank if you’re seeing those names on the mortgage commitment, and the broker’s charging you a fee, they are also going to be getting paid on the back end by the lender.

Now why am I telling you this? Because I’m tired of seeing it. I’m tired of seeing borrowers in perfectly good situations paying these extra fees to pad the wallets of these guys who are making way too much money doing no more work than I do.

I don’t charge fees on any bank mortgages. That’s a promise to anybody that’s listening. If you get a mortgage through me, there will never be a fee to deal with a specific tier one bank. I would never be charging those fees.

The lender may charge a fee if I’m doing a bankruptcy discharge, or there may be individual fees associated with applications and stuff, but that has nothing to do with the brokerage fee. I as the broker will never charge my clients a fee if I’m putting them with a bank.

Now there are a lot of extenuating circumstances: commercial mortgages, private mortgages, all that type of stuff where there might indeed be fees. I’ll very upfront and tell you when that’s going to apply. I’m not going to spring it on you at the closing date.

You’re going to know long in advance, as soon as you get an approval, if a fee is going to apply. You’re probably going to know it before that, because I’m going to tell you if that’s the situation.
Again, if you’re dealing with a bank, there shouldn’t be any fees, and for you brokers out there that are changing fees on bank deals, I’m here to eat your lunch.

For the Mortgage Centre, I’m Rowan Smith.

Vendor Take Back Mortgages – Take Back – 2nd Mortgages

Saturday, September 11th, 2010

Transcript of Video Blog:

Hi, everyone. I want to talk today about something — I haven’t done a blog post for quite a while — and that’s vendor take-back mortgages. What is a vendor take-back, and when does it apply?

A vendor take-back is essentially a situation when the vendor agrees to take back a mortgage in lieu of some cash. I’m going to give you a really clear basic example, but then I’m going to show you what everybody always wants and why it rarely works in Canada. It works in the United States quite smashingly, but it doesn’t work so great up here north of the border.

So, a vendor take-back: if you assumed that a guy wanted to buy a piece of property that was $400,000 but he didn’t really have a down payment, what he could do is go to that vendor and say, “Listen, what I’m going to do is I’m going to get $20,000 from someone over here. Will you carry the balance of the mortgage?” meaning, will you loan me the money and take the property as security?

Now not all sellers are going to be willing to do this. First off, they’re going to want an interest rate, probably higher than the bank’s, to make this worth their time. Secondly, they have to not need those dollars to go buy something else because they haven’t received them from you. You borrowed it from them.

That’s a standard vendor take-back situation. I’m dealing with a guy out in the country right now who bought a house with a massive shop on a huge piece of acreage. The banks didn’t want to finance it because the house is old and rundown, and he was buying it purely for an 8,000 or 10,000 square foot shop that was on it that was wired up for his business. For him, it made great sense.

The vendor was an old guy. The vendor agreed to lend him 100% of the purchase price. Great, he can do whatever he wants, but he’s got to pay that guy the interest. Eventually, as he accumulates money from running his business, he’s going to have to get a mortgage from somewhere to pay that guy out, because that guy’s going to eventually want the dollars.

But here’s the situation we run into frequently where people think a vendor take-back would work. They know they need to get 20% to buy a rental property, so what they say is, “Well, why don’t I put 10% that I have down, and then the vendor gives me 10%, and then we get the other 80% from the bank?”

The reality is that banks generally don’t go for this setup. They don’t want to see vendor take-backs, because if they do, they now have to factor in that payment and can the person afford the vendor take-back payment, the mortgage payment, plus any other debt payments.

If they can, great. Then there might be something we can do. But in the 10 years that I’ve been doing mortgages and banking, I’ve never seen that situation once. So you generally need 20% of your own equity before a vendor take-back becomes an option.

Now you say, “Look, I’ve got 20%. What do I need the vendor take-back for?” Still, 80% is still a pretty high amount of financing, and if your property’s unique or your situation’s difficult with credit or income, maybe you’re going to need 35%. So you’ve got 20; you need 35. Where’s the 15 come from?

That’s a circumstance where a vendor take-back might make sense, and it may be a situation where we can use it. But I need to look at the situation as a whole, because the property, the source of your down payment, and your income and credit all form a very integral piece of the puzzle, and we’ve got to look at that together.

From the Mortgage Centre, I’m Rowan Smith.

Private Mortgages / 2nd Mortgages – What is Private Money

Thursday, September 9th, 2010

Transcription of Video Blog:

Hi, everyone. It’s Rowan Smith from The Mortgage Centre. I’m here today to talk about private mortgages, private money. What is it, when do you want to use them?

Well, private mortgages are really just that. It’s a mortgage funding and financing that is set up by a private individual or a corporation. Now, these are not financial institutions. This could be somebody who is just very wealthy and is looking to lend a friend or family member money, or it could be someone who just has a bunch of funds sitting around and wants to earn a return that is greater than they can earn at the bank.

So, with a private mortgage like that, the borrower would usually have to go through the broker or they have to know the lender directly and approach them and get the mortgage set up. Now, why would you do this? You’re going to face higher rates than the bank; you’re going to face fees for sure, so why do borrowers do it?

In most cases it’s because they can’t qualify under traditional guidelines. Maybe they’re in the midst of a divorce. Maybe they’re in the middle of a career change. Maybe they’re currently unemployed and just need to use some of that equity that they’ve built up in the property, to get them through until their new job starts.

There are a lot of very legitimate reasons why people need private money, and very legitimate reasons why the banks won’t give them the loans under the circumstances. If you’re in one of these situations, private mortgages might be the way to go.

I have a lot of private lenders ranging from very wealthy people to very large mortgage investment corporations, that can look at your situation and will make more sense, than perhaps your bank who is looking to have you fit within the bank box.

So, if you know somebody who is in a tough situation and needs access to funds, I can help them.

From The Mortgage Centre, it’s Rowan Smith.

Top 5 Things NOT To Do After Writing An Offer

Thursday, July 22nd, 2010

Transcript of Video Blog:

Hi everybody, it’s Rowan Smith with The Mortgage Centre. I’m going to do a little top five list. These are top five things not to do once you’ve written an offer.

OK, so number one. Do not write an offer and leave on vacation. Now there’s a couple of catches to this, OK?

You can do it. But during the subject removal period I’m going to need you here. Your Realtor is going to need you here to sign things, review documents.

So don’t write an offer and expect to be able to leave town during the subject removal period. Especially do not be gone during the closing period.

Because you have to be here to sign in front of a lawyer, especially if you’re buying property in British Columbia. So you’ve got to be here.

Now if you’ve got two months from the time you write an offer to the time your completion is, feel free to be out of town for part of that time.

I mean everyone’s got work and business obligations. And they may want to take a vacation. That’s fine. But just keep those vacations coordinated with the home buying process. It’s a big item. So vacations are a very important thing.

Number four. Do not transfer your dollars around for your down payments. People will often be in an effort to be helpful to me, they will transfer dollars from their ING account into their CIBC checking. From that TD savings into their CIBC checking. From their RSP into their checking.

The problem is, then I get a copy of that checking account statement, and it looks like you got a whole bunch of money just flew into the account.

So what I end up having to do is document every large deposit on there. That means I have to get the ING, the TD account, the RSP account, and the CIBC checking account. I’ve got to get it all to track where every dollar is. It’s a lot easier to just leave the funds where they are.

And once we’ve got the down payment accepted by the lender, then you can move them around.

Number three is, do not buy lots of new things, especially on credit. And I’m referring to people that will gloat and they’ll get excited about buying their home. And so they’ll go to The Brick and they’ll buy a whole bunch of furniture on a “do not pay plan.”

And then they’ll go to Best Buy and they’ll buy appliances and all this type of thing. Do not do that.

Wait until you’re in the home. If you incur additional debt before the closing date and the bank finds out about it, they can pull that approval. Because you may not qualify even though you can afford, you may not qualify for that new debt in addition to the debts you already had.

Now this is even if those debts are going to be paid out prior to the completion with the sale of an old home. Just check with me first. Be very careful about buying new items.

Number two. And this is the most common one that I see of buying new items, is do not buy a new vehicle. Those vehicles, especially vehicle leases, have massive payments, or can have massive payments. And it can throw the debt servicing and your ability to qualify for the mortgage. Again, completely out of line.

So before you go do that, get your mortgage completely finalized. Have the approval ready. Have it instructed to the lawyer’s office, and then you can start shopping for a new vehicle. I still don’t recommend buying it until after you’ve purchased the new place, just to avoid any challenges.

And lastly, the number one that I consistently get that blows me away is, do not quit your job. From the time you write that offer until the time you move in you have to be prepared to stay in your line of work.

Now things happen. Sometime companies sell off divisions. You get transferred. Other times you may just get fired. That’s life.

But the reality is that you also will have a lot of choice in these cases many times. And there’s no need to quit your job right during that period of time.

So from the time you write that offer to the time you complete, stay on your job. Stay the course. What you do after you’re in the property is up to you. And life takes many changes and it’s unpredictable.

So there is no way that anybody can fault you if you lose your job two months down the road. Or you quit and transfer into a new role to get a pay increase or whatnot.

So there it is. The top five things not to do when you’re buying a home.

For The Mortgage Centre, I’m Rowan Smith.

Appraisals – When Are They Required?

Sunday, July 11th, 2010

Transcript of Video Blog:

Hey everybody, it’s Rowan Smith of the Mortgage Center. I’m here today to talk about appraisals. There seems to be a lot of confusion as to when appraisals are ordered, when they’re not ordered.

This blog today is going to detail in what circumstances it’s going to be needed. It’s a little counter intuitive. You see there’s typically an appraisal or some assessment of value 100 percent of the time. Does that mean that they go through the property and take pictures every single time? No.

So, I’m going to divide this into three categories, less than 20 percent down, 50 to 20 percent down and greater than 50 percent down. Those are the three main categories. You can argue with me a little bit on this, but that’s the three general guidelines.

Now, less than 20 percent down, the bank’s going to want to make sure they know the value of the property, but do they require an appraisal? The typical answer is not usual. The reason being is less than 20 percent down are insured by either CMHC, Genworth and Canada guarantee. It’s mortgage insurance. That’s that big insurance premium you hear about.

Now, in those circumstances those lenders typically, though not always, have a internal modeling software that looks at sales in the area and the last prices, listings, et cetera. And as long as you’re within a range of normalcy, not wildly above or below, they’re going to accept that value.

Now, there’s times when even when you’ve got the mortgage insurance, they still ask for appraisals. And that’s sometimes when there’s a rental component to the property or it’s particularly unique or a high-end home or for whatever reason that they don’t support the lending value of the home. So, that’s if there is less than 20 percent down, they typically don’t need appraisals. But, again, an assessment of value is always being done.

Now, from 50 to 20 percent down, you will almost need an appraisal 100 percent of the time. Now, some banks, a social bank, has an internal property assessment tool that they use, and they will do similar to those systems through the mortgage insurers.

They’ll do like an electronic appraisal, but they have some guidelines there. The property can’t be more than a certain value and all those eligible for homes beyond a certain age, size or whatnot. Usually, those electronic systems are only allowed in a major urban setting, whatnot.

So, most times 50 to 20 percent down payment, you’re going to require an appraisal. It costs about $250 to $300, depending on where the property is located. This is assuming it’s a general, normal transaction.

The appraiser will go to the property, takes some photos and walk through it and then prepare a report of anywhere from 40 to 70 pages, depending on the complexity and depending on the lending requirements. It outlines everything about the property and makes an assessment of value, based on other comparable sales.

Now, you may think to yourself. OK, well, if I’m putting 20 percent down or more, why do they want an appraisal. When I put less than 20 percent down, they don’t want an appraisal. And the answer is that when you’re putting 20 percent or more that bank is absorbing the full risk of that mortgage.

If you default on it or the property values fall and you walk away, they eat the loss versus the mortgage insurers are the ones that take the loss in the event that you’re putting less than 20 percent down. So, the bank leaves it up to them because they ultimately will be the one at risk to make an assessment of value.

So, less than 20 percent down, probably not an appraisal but you may have to, depending on the property. 50 to 20 percent down in that range, you’re going to need an appraisal of some kind, whether it’s an electronic one or whether it’s a walk-through.

Typically, it’s a walk-through. 50 percent or more down, we can often use tax assessed values because it is such a low amount of financing. It’s a very low risk to the lending institutions.

Some banks unequivocally demand appraisals 100 percent of the time. Other ones will use a property assessment tool if you have that much down the desktop or drive-by appraisals which are less costly and quicker to get. But it will still provide with some comfort.

Those are the situations where an appraisal will be required. If you’re being asked for one and you don’t understand why, just give me a call. I’ll give you an explanation for it.

I’m Rowan Smith from the Mortgage Center.

Maternity Leave and Mortgages

Saturday, July 10th, 2010

Transcript of Video Blog:

Hey, everyone. Rowan Smith with The Mortgage Centre, here today to talk about maternity leave and mortgages, because this is a big thing that comes up. People oftentimes end up going on maternity leave and then realizing the house is too small. They go to qualify for their mortgage and the bank tells them, “Sorry, you can’t qualify. You can’t afford it.” And they go, “But I’ve got a job I’m going back to, where I’m going to make $100,000 a year.” And they say, “Well, you might go back.”

Statistically, a very large percentage of women that take maternity leave don’t go back. So the bank has to hedge its bets. It has to look at, “Can you afford this now, with your reduced income? Can you afford it if you don’t have that income?” Most times, people come to me with maternity-leave questions, and there’s six months or three months left, and they’ve realized, “I’ve got to get into a bigger place. I’ve had my second or third child,” or whatever the case is. And, “I need more space.” The husband’s income maybe doesn’t qualify a loan, so the wife comes and starts the application process. Very common problem. They’re told no at most institutions.

Now, I have lenders that will treat maternity leave a little more favorably. If you’re going back to a decent job, and you’ve got a letter from your employer confirming that the position awaits you and the salary awaits you, we can generally use it. We can typically get around it if you’re otherwise strong clients with clean credit and if the income otherwise makes sense. If you’ve just gone on mat leave, and you’ve got a full year ahead of you, it’s a little harder, because that’s an extended period of time where you’re going to be forced to make payments that you would qualify with on your normal income on the EI or the government-subsidized maternity-leave portion.

Now, some companies are very good. Some companies actually offer women a top-up. So if you’re only going to get 60 percent of your income throughout the year when you’re on maternity leave… The companies, these are good employers, will pay a top-up to bring you back up to 100 percent of what you’d be earning. In those circumstances, we can definitely use it. But again, certain banks have just hard-and-fast policies where, “If you’re on mat leave, we can’t help you, ” and it doesn’t go much further than that in the discussion.

Well, I can help you. If you’re on maternity leave and you’re looking to find out if you can get a mortgage, yes, please give me a call. It’s Rowan Smith from The Mortgage Centre.