We get questions frequently with people trying to do debt servicing calculations for themselves using their bank’s online mortgage approval tools. While helpful, these tools are set up to be wildly conservative, and to use, in many cases, rates and guidelines that are out of date, or not a true reflection of what is available in the marketplace.

I did this video blog as an explanation about what your banker (or broker) is talking about when they say the words “Debt servicing.”

TRANSCRIPTION OF THE VIDEO:

Hi everybody, it’s Rowan Smith from the Mortgage Centre. I want to talk today about “debt servicing.” This is something that you are going to hear brokers and bankers bandy about the word as though you know what it means. If you are not in the industry, you probably don’t.

What it essentially means is your ability to make payments on a particular amount of debt based on your provable and documentable income. So where debt servicing becomes important is if you are applying for a mortgage, and let’s say you’ve been paying $850 a month in rent, and you’ve been paying it for 10 years. You want to apply for a mortgage. The bank may or may not believe you qualify for a $850 mortgage payment. Just making an $850 rent does not prove that you have the financial wherewithal, on paper at least, to make that payment from a qualification standpoint. The bank may say that the mortgage, and the deal itself “debt service.”

So where do those numbers come from? What were they looking for?

Debt servicing is a calculation based on your gross taxable income. Now, every bank treats this differently. Every institution has their own quirks, own twists, own rules. If something is less than 20% down, you have to meet insurer guidelines: CMHC, Genworth, AIG. If something is more than 20% down, you still may have to meet those guidelines depending on which bank you go with. Although alternatively, those banks may have their own non-high-ratio or conventional mortgage guidelines that they follow.

So, what are the rules? How is it calculated?

It’s a complicated formulate, so what I’m going to do a verbal of this whole blog post, but I’m also going to post the calculation so you can understand how I’m explaining it. There are two different numbers to be aware of: GDS (Gross Debt Service) and TDS (Total Debt Service).

Gross Debt Service is what percentage of your gross income is being used for housing expenses. So that is going to include the principle and interest on your mortgage, property taxes, some of the strata fees, and in some cases, depending on the lender, heat. So it’s principle, interest, taxes, heat, and strata fees (if applicable). That is what will go into your gross debt service. What they are looking at is you add up all that stuff (and you only use 50% of strata fees – which is a rule that is often overlooked) and you find out what percentage of your monthly income those are going to make up.

Now, what income figure do you use? You don’t get to use just last year’s with big bonuses or something. It depends. Again, this is where it depends. You’re going to hear me say this a lot. That is why guys like me are in business: because we know which banks, which lenders, look at income correctly (based on your situation).

If you are salaried, it’s very straightforward. They’re just going to look at your base salary. If you are commissioned, and you’ve been there a couple of years, they are probably going to look at your last 2 year’s average of your line 150 income on your notices of assessment or T4. If you are self employed, they may use the same thing, or they may “gross up” your income because there are write-offs and what not. Certain lenders use “addbacks” where they will put back non-cash expenses into that notice of assessment figure. Things such as depreciation, vehicle expenses if you are a sole proprietor, and that kind of stuff.

So, knowing what income figure to use is very difficult. Generally a two year average will work (or be accepted) or your base salary. Those are the safest numbers to use.

So what percentage with that Gross Debt Servicing (GDS) are they going to allow? The typical rule, historically, used to be 32% but the industry has kind of changed and generally if you have got an ok to decent credit score it’s going to be 35% of your gross income. On the flip side, if you got exceptional credit, you might be able to go as high as 44% of your gross overall income.

The second ratio is Total Debt Servicing (TDS). That is the second ratio they are looking at. So the bank wants to know two things:

1. Gross Debt Service – What percentage of your income is being consumed by housing expenses
2. Total Debt Service – What percentage of your income is being consumed by housing expenses, and all other monthly obligations that are on your credit bureau

TDS includes things such as: credit cards, lines of credit. Things they don’t look at: cable bills, basic utilities and stuff. They assume that comes in the other 58 or 60 percent of your income.

So, Total Debt Service is everything that was in Gross Debt Service: principle, interest, taxes, heat, and 50% strata fees (if applicable), PLUS all debt payments: car loans, car leases, credit cards, alimony payments, or anything like that.

Now, where is that number? Gross debt service, they didn’t want to see it higher than 35% unless you had exceptional credit and it would be allowed of up to 44%. With Total Debt Service, all your debts, they don’t want to see that any higher than 42% to 44% again depending on credit, and again dependent on bank to bank to bank. There are very big differences across the board.

I’m going to do some examples down below that you can look at and follow through a couple scenarios that I can show you how to calculate it. The rules of thumb are:

1. No higher than 35% GDS
2. No higher than 42% TDS

If you can fit it within those guidelines, you are probably going to get approved based on your taxable income. If you are not declaring something, then don’t think to bring it into the equation, because the bank can’t (use it).

So with that, take a look at the list of information that I’ve put below. If you have any questions or comments, please send it to me or rate the videos.

For the Mortgage Centre, I’m Rowan Smith.

Thanks for watching!

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EXAMPLE 1 OF 3 ON HOW TO CALCULATE DEBT SERVICING

Facts:
Person is salaried and earns $65,000 per year as a base salary ($5,417 per month)
No bonuses or overtime are earned
Mortgage payment they are looking at is $1,400 per month
Property taxes are $100 per month
Heat is $50 per month
Strata fees are $200 per month
Client has a credit card with a $75 per month payment
Client has a car payment of $250 per month

HOW TO CALCULATE GDS:
1400 Mortgage Payment
+100 Property Taxes
+50 Heat
+100 50% of strata fees
$1650 total

1650 / 5417 = 30.29% GDS (within guidelines)

HOW TO CALCULATE TDS:
1400 Mortgage Payment
+100 Property Taxes
+50 Heat
+100 50% of strata fees
+75 Credit card payment
+250 car payment per month
$1975 total

1975 / 5417 = 36.46% TDS (well within guidelines)

CONCLUSION: Assuming no derrogatory credit history, this mortgage will likely be approved at the majority of financial institutions.

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EXAMPLE 2 OF 3 ON HOW TO CALCULATE DEBT SERVICING

Facts:
Person is an hourly employee with a base salary of $30,000 plus bonuses
Total income on line 150 in 2008 was $75,000
Total income on line 150 in 2009 was $81,000
Mortgage payment they are looking at is $1,750 per month
Property taxes are $100 per month
Heat is $75 per month
Strata fees are $300 per month
Client has a credit card with a $200 per month payment
Client has a car payment of $550 per month

HOW TO CALCULATE GDS:

Income they will use is a 2 year average of income (at most banks) so that’s what we’ll use. 2 year average is $78,000 or $6,500 per month.
1750 Mortgage Payment
+100 Property Taxes
+75 Heat
+150 50% of strata fees
$2075 total

2075 / 6500 = 31.90% GDS (within guidelines)

HOW TO CALCULATE TDS:
1750 Mortgage Payment
+100 Property Taxes
+75 Heat
+150 50% of strata fees
+200 Credit card payment
+550 car payment per month
$2825 total

2825 / 6500 = 43.46% TDS

CONCLUSION: This is outside the range that many lenders will allow. However, it is within the guidelines of CMHC and many lenders if the person has exceptional credit. The chances of this getting approved are good, but not perhaps at the lender the client thinks.

____________________________________________
EXAMPLE 3 OF 3 ON HOW TO CALCULATE DEBT SERVICING

Facts:
The applicant is a realtor who is fully commissioned
The realtor’s gross earnings, before write offs in 2008 were $250,000
The realtor’s gross earnings, before write offs in 2009 were $178,000
Total income on line 150 in 2008 was $52,000 (after write offs)
Total income on line 150 in 2009 was $35,000 (after write offs)
Mortgage payment they are looking at is $1,500 per month
Property taxes are $100 per month
Heat is $75 per month
No strata fees
Client has a spousal support payment of $500 per month
Client has a car lease of $550 per month
Client currently lives in a high end condo in Yaletown Vancouver that he rents for $3,500 per month and has never missed a payment in 5 years

HOW TO CALCULATE GDS:

Income they will use is a 2 year average of income of line 150 (at most banks) and they’ll “gross it up” by 15%. So, $43,500 is the two year average of line 150 plus 15% is a total income the banks will use of $50,025 per year or $4,168.75 per month
1500 Mortgage Payment
+100 Property Taxes
+75 Heat
$1,650 total

1650 / 4168.75 = 39.58% GDS which is outside of most bank guidelines unless the realtor has exceptional credit. Let’s assume they do and continue…

HOW TO CALCULATE TDS:
1500 Mortgage Payment
+100 Property Taxes
+75 Heat
+500 spousal support payment
+550 car lease per month
$2700 total

2700 / 4168.75 = 64.76% TDS

CONCLUSION: This is WELL outside the range that banks will allow. This deal is not getting done normally.

I have included this last example to show that even though someone brings in a lot of money, it is TAXABLE income that matters. I have had many bankers say to me, “you win in the tax office, or you win in the bank, but you never win at both!” This is a classic example, that you need to pay taxes on your dollars if you want the banks to consider it.

Now, for those in the industry that are watching and reading this (most of my viewers are in this category), yes, there is maybe the possibility of using some “addbacks” of non-cash expenses to get income higher, or possibly using a “stated income” program, but this is beyond the scope of this blog post and will be heavily dependent on down payment source, credit score, and the reasonability of the realtor’s stated true income.

So there you have it: three scenarios and an explanation of debt servicing. This barely scratches the surface of which bank does what, when, and under what circumstances, and for that, you should be using my services. After all, my services are free for residential bank mortgages, and I offer the best service level in the industry.

Thanks for watching!

I get questions from buyers all the time about buying a home, and then assigning the contract just before completion. This is fine, but people make the assumption that if they are approved, they can assign their approval. This is incorrect. While you can assign almost any contract, except some pre-sale contracts, that says nothing about whether or not the financing will be available to the new assignee who holds the contract rights. Financing does not follow an assignment of a contract.

To explain what an assignment is, and how they work, I’ve done the following video blog. Enjoy!

TRANSCRIPTION OF THE VIDEO BLOG:

Hey everbody, it’s Rowan Smith from the Mortgage Centre. I want to talk today about assignments: what assigning a contract means, what your obligations are as the assignee and the assignor.

Now, I want to define what an assignment is. Let’s say you purchased a place, or you wrote a contract on a place to buy a home. Maybe the completion date is April 15th or something like that and it is January 13th today. Now, you go and you take time and you arrange your financing, you get everything in place, you remove subjects, you get all of that done and then what happens? You get transferred in your job. You can’t back out of that contract at that point. You have entered into it. It’s binding. You’ve removed subjects. You still have to complete even though you’re being transferred to another province. You can either rent the place out or you can try and sell it on assignment.

Now, what that means is that you’re going to try and sell the rights to that contract. A lot of people used to use these to make money in the late 90’s and early 2000 and onwards. The way they would do it is they would buy a pre-sale. So, maybe the place is going built in, you know, 2 years down the road, and the person would write the contract today. They would get into it with a small deposit, and then they would go and they would have to wait two years until the property would be completed. Now, during that time, of course the market was rising and rising and rising. By the time they had to complete they had only had to put a very small percentage down.

So, their options were to complete and buy the place for that value, or their option was to sell it on assignment and ask for some “lift.” Lift is the value that has resulted from the market prices rising when you contracted to buy the place here and the developer is stuck with your price here, and then two years later, you are selling it for this amount before you actually complete. So, someone is buying that contract from you and if the value of the home has gone up $100,000 you could get $100,000 up front based on selling your assignment.

However, some banks don’t allow assignments. So when it comes to financing, you have got to be careful. The other thing is, going back to my example of a home that is going to close in April, if you were to sell that home chances are there isn’t going to be a material difference in the value of the home at the end of only a couple of months. So you’d be lucky to get your actual purchase price. If you were buying it for, say, $400,000 you would probably only get (I’m grabbing numbers out of the air here) $390,000 or $385,000. Something like that (this is because you are being forced to sell quickly due to the transfer). So, you may still be out money.

If you are fortunate, someone will buy the contract off you for the same amount that you were going to be paying for it. Therefore it would be a wash. Rarely does life work out that well, however. So, I’ve had some inquiries on assignments and a couple of things have come up that have lead me to see there are some misunderstandings regarding these topics.

When you do an assignment, when you try and sell the contract, you are not selling your financing. So if you have gone and arranged a mortgage and it is totally done, and you are completely approved to buy a home – you are completely approved to buy THIS home on THIS date for THIS price – you turn around because you got transferred and I want to sell the right to buy that home to somebody and just try and break even and get my money back, I CAN DO SO.

That person (the buyer of the contract on assignment) has to arrange their own financing, and how they do so is entirely up to them. They may not even need financing. Maybe they are a cash buyer and are going to pay for the contract outright.

The important lesson here is that you cannot assign your financing prior to completion. You’re only assigning the contract, so it’s very important to make that distinction.

Thanks again for watching!

There are a lot of properties, especially in East Vancouver, where the home has a main floor, and 3 or 4 or MORE basement suites (or carriage house). The clients often go to their bank, and are told the lender will only use 2 suites for rental income, or won’t give them ANY credit for rental income, and they need it in order to qualify.

It is usually at this point that the clients contact me, and ask me why their bank is telling them their home is commercial property, when it is a home with 4 basement suites!?

This video blog outlines the defining characteristics of what is residential and what is commercial real estate and the various financing requirements that each has. The differences are great, the down payment requirements vastly different, and the manner the banks qualify you is in an entirely different world. Watch and I’ll explain how the banks think.

Transcription of the Video Blog:

Hey everybody, it’s Rowan Smith from the Mortgage Centre.

I’m taking a lot of inquiries on properties that have 4, 5, or 6 suites in the home, and you know, East Vancouver has a lot of these especially in some of these larger, older, turn of the century homes that were built. The people have converted them over the years from being a kind of large mansion, to being a six or seven unit property.

I want to define what constitutes a commercial property versus what constitutes a residential property because the mortgage requirements, and the paperwork requirements, and the rate that you’ll pay, are heavily dependent on whether you are going to go residential or commercial (in terms of financing requirements).

A couple of things:

On a residential basis, if the property has more than 4 (four) units that is going to be constituted as commercial. There was one lender, Bank of Montreal, that used to do five units, but that is all gone. So if you have a property that has a main floor and four suites, that’s a commercial property so long as your are going to be using the income from that property to qualify for the mortgage.

There are some appraisers out there who are used to working with these five and six unit properties who have said that we have three units with two unauthorized suites, but that gets us into the issue of whether it is authorized or unauthorized, how much are you putting down, and all this. So, by and large, the rule of thumb is: four units in one property is residential. Anything beyond that (no matter how good the story or finances look) is commercial.

Now, if it’s zoned commercial, but people are using it residentially, it is still a commercial property and it will be judged and evaluated by lenders on that basis. Where you see this is (trying to think of areas in Vancouver): Kingsway, and these type of areas where there is a lot of low lying sprawl of commercial units in the basements (and you’ll have everything from nail salons to restaurants) with residential suites upstairs. If you are looking at one of these, they are “cash cows” and generate a lot of rental income when you have a commercial lease underneath generating the bulk of it, and a couple of residential units on top; often the owners will choose to live in those units and they sound great in principle, but because they are zoned commercial in a commercial area, they get treated commercially.

Now you say, “well what does that mean?”

First, you’re going to require a much heavier down payment:” probably 35% or more. There are some ways around this using expensive private financing , but if you are thinking of getting bank rates, that is what you’re going to be looking at. 35% down is number one.

Second, you’re going to need a commercial appraisal. They start at about $1,500 and they take a month! They don’t take three days or two days like a residential appraisal, so your subject removal period will have to be substantially longer.

Third, you are going to be looking at possibly requiring environmental studies. They (the lenders) want to look at the surrounding area and see if there is a fuelling station or a cardlock. Was there ever a drycleaner or any other chemical heavy, environmentally intensive, or environmentally dangerous business around you. Even though it’s not in your building, per se, but if it is within a very close proximity, it still impacts whether or not banks are going to want to finance it. Because, they don’t want to be on the hook, having to foreclose, when it turns out your property has massive environmental problems down the road.

So:

1. Larger Down Payment
2. Environmental Studies
3. More Costly, Slower Appraisals

And, the environmental study could be one, two, or three stages (or phases) depending on the type of property and they type business that is in it, or has been in it in the past.

In Summary:

More than four units, you are going to face commercial guidelines, probably going to pay a higher rate, and fees as well, with a much larger down payment.

Four units and less, you can get it done under a residential basis as long as it’s not zoned commercial or in a commercial area that looks like light industrial as well. So, if you are looking at buying one of these properties and you want to know if it’s even feasible, let me just take a look at it. It will take me five minutes of our time, we’ll go over the property, and determine whether or not it’s going to fit under residential or commercial guidelines, and how best to get it financed, and what you’ll need to do so.

For the Mortgage Centre, I’m Rowan Smith.

We take many calls and hear anecdotal stories from clients about how they were “pre-approved” by their bank (or another broker) for $265,000 but when the deal came together it all fell apart because the bank would only give them $150,000 (or some such story). My career is filled with client stories from their banks.

This doesn’t happen when a client uses me on their purchase or pre-approval.

This video blog outlines what a PRE-Approval really is, what you can rely on, and why my service level is very different (and superior) to most brokers, banks, and the competition at large.

Transcription of the Video Blog:

Hey everybody, Rowan Smith from the Mortgage Centre.

It’s January 2^nd right now, and I got a call today from a client who mystified because their pre approval that they were told was going to be there waiting for them at their bank, wasn’t. So, I wanted to clarify what exactly a pre approval is, as well as what “underwriting” is, in relation this concept.

So, backing it up, “underwriting” is the process whereby a bank actually looks at your application. They look at your documents: job letters, etc… and make sure that all of these details add up. That your paystubs are in line with what your job letter says; that your down payment is coming from own resources, and if isn’t, then they have to find out where IS coming from. Based on all of this process, they underwrite, and come up with an assessment of risk, and this is a time consuming process and is something that the banks spend a lot of money on staff to review paperwork, to review a deal, to work through the numbers and the nuts and bolts of a deal.

If you are trying to buy a property and you go to your bank and you get a pre-approval, you assume when they give you that piece of paper and it says “$265,000” on it, and you’re holding that up to your realtors saying, “I’ve been told that I’m pre-approved for a mortgage of $265,000!”

But, you go and write an offer and then all of a sudden your banker is telling you, “well, you know, actually your job letter didn’t say this that or another thing,” and you may have even provided that job letter up in advance and are wondering, “well then, what was the point of all this exercise?”

So, what is a pre-approval?

A pre approval is JUST the lender taking a cursory look at application, as it stands, and saying, “IF, the documents that you provide us later on, when we review them” (because they NEVER review them for a pre approval – that’s our job as brokers is to make sure your paperwork says what you’re telling us it says – very commonly a client will say they make $60,000 per year and they have been on the job for maybe 11 months, and truth be told, when we look at their paystubs they are on pace for about $60,000. When we get the job letter, it may show $35,000 base salary with bonuses or overtime or commissions or what not. Because you’ve got only 11 months of track record, you won’t be able to use that bonus money. You’re going to need to use a two year average. Now, if you weren’t making $60,000 beforehand, you can see how that average could be maybe misrepresentative of your real value or your real income but IT’S WHAT THE BANKS WILL USE WHEN QUALIFYING YOU.)

So, when you get a pre approval , what differs with me versus another broker or your bank is that I WILL UNDERWRITE the file. I will look at all of your documentation up front. I will insist that you provide me with job letter, paystub, statements of your bank account, down payment confirmation, gift letters if it is appropriate, statements from your various credit cards and loans and lines of credit. I know how the bank is going to look at it, and I can make sure that everything I provide you in my pre approval when it says “$250,000” or $265,000” so that when you actually write an offer, the bank honours that amount.

For the Mortgage Center, I’m Rowan Smith.

Hi Everyone,

Thank you for your comments, emails, phone calls, and ratings. I appreciate all of it.

I’m making a special offer from January 11th (inclusive) through January 18th (inclusive), for every rating or comment I receive during these days, on my videos on Youtube, I will donate 1 can of food or 1 food item to the food bank. This will allow me to give something back to a worthy cause, and will possibly put me on the hook for a lot of money if you come through as I expect you will. Pass this on to friends and family, and let’s see what we can raise.

The link to my Youtube channel is:

http://www.youtube.com/user/canadamortgage

Click the 5 stars (if appropriate) and put a comment down and it’s a fast way to get a donation made to the food bank.

Here is my video blog saying the same thing:

Transcription of the Video Blog:

Hey Everyone, it’s Rowan Smith from the Mortgage Centre.

I want to thank everybody for all their comments they’ve posted, the ratings that they’ve  given me, and the feedback that gotten both on and offline. It’s been very helpful. To thank everybody for that, I’m going to be doing a charitable or charity offering here:

For every comment received between January 11^th (inclusive) going through to January 18^th (inclusive) I will be donating 1 can of food to the food bank. That is for every individual rating I get on my videos that you can see in the channel all below here, and every one of the comments I receive.

So, I could be on the hook for a lot of money depending on how many people are actually watching, but if you can help out that would be fantastic, and then I can make a donation to a worthy cause.

It’s Rowan Smith for the Mortgage Centre.

We take calls all the time from clients who want to buy a home with substantial basement suite income, but their bank is either ignoring it, or not treating it seriously.

This video blog explains the difference between authorized and un-authorized suites, and how the various banks will treat that income. It also explains how to make suites authorized, and the different way the banks will look at that income when qualifying you for the mortgage.

Transcription of the Video Blog:

Hey everybody, it’s Rowan Smith from the Mortgage Centre.

I want to talk today about basement suites and basement suite income. You’ll see them written up in MLS listings or hear them referred to by realtors as “in-law suites” or “mortgage helper” or anything of that nature.

Depending on what municipality you live in, there are different regulations that dictate what you have as being either an “authorized suite” or “unauthorized suite.” While the difference, on a month to month cashflow basis is nothing to you as a home owner, the difference between how the bank will look at this income and use it, if at all, is very important.

If you are in Vancouver, Vancouver has very specific regulations pertaining to fire code: you have to have sprinklers installed in the suites, fire escapes, an electricity panel in a common area and there are many other things. You’ll have to check with your specific municipality to get the regulations that pertain. Every municipality is different. Surrey is different than Vancouver. Vancouver is different than Coquitlam, and etc…

If a city has specified that there are requirements for suites, then you have to either adhere to them, to make it an “authorized suite,” or you have to just rent it out as it is as an “unauthorized suite.”

This isn’t that big of a deal if you don’t require the suite income in order to qualify for the mortgage. On the flip side, if you need that money (meaning, if you had a vacancy for a year, it would be financially distressful) then we need to be very careful on how we structure your financing.

When you are putting less than 20% down CMHC will not allow the use of income from an un-authorized suite. CMHC is a government run organization, and as such, they’re going to make sure that any property than they finance meets the government regulations. Well, we’re not going to have CMHC on the one hand financing a property that doesn’t conform to city regulations when the two are both government organizations.

Now, there IS another mortgage insurer (two others in Canada): Genworth and AIG, and Genworth WILL allow the use of unauthorized suite income. They typically will require a greater degree of paperwork and underwriting: they’re probably going to want a letter of economic rent, from an appraiser, to tell the lender what the suite will realistically rent for in the marketplace. They aren’t just going to take our word for it. They’ll want something on paper, or a lease agreement or something of that nature.

If you are buying in a area and you aren’t sure if there is an authorized-versus-unauthorized issue there: for example, if you go out into some of the outlying areas there isn’t this problem.  They have not specified, in some of the smaller towns an municipalities, that you have to have certain things done for the property to be authorized.  If you are in the area where some of them, all you have to do is declare it to the city, and pay the slightly higher level of taxes: double water, garbage removal, and that kind of thing, and it is a nominal amount of money. It’s not something that should be preventing you from doing it if you need to get that suite authorized in order to qualify for it.

So if you or someone you know is trying to buy a property using basement suite income, and maybe, for reasons they aren’t clear of, their bank is ignoring that income or is treating it oddly and not really giving them full credit for it, or not helping with the mortgage when, in reality, that (income) is a substantial amount of money, and you feel that it should be given more treatment, then GIVE ME A CALL.

We have a number of lenders that use all three mortgage insurers and lenders that will allow you to use authorized or un-authorized suite income , both, and give it the same treatment. If you are in that situation, give me a call.

It’s Rowan Smith at the Mortgage Centre.

People ask the question all the time:

“Why should I use you? Why not just go to my bank?”

There are a lot of reasons. Watch this video blog for my explanation.

Transcription of the Video Blog:

Hey everybody, Rowan Smith from the Mortgage Centre.

I got several comments back on some of my videos I posted recently, and one of them was an email to me personally that said, “why should I use you? What makes you different than my bank?” especially given that one of the rates I was quoting, and one of the products I was talking about, was issued by his own bank. So, I wanted to put together a post on why you should use a mortgage broker.

There is a service component. That is first and foremost. The most important thing. We are available, or at least, I am available, seven days a week, from 9am to 9pm. I make myself available later than that if clients require it.

Now the reason being is, it’s not just that I’m a workaholic, although, many would say that. It’s also because people are writing offers in the evening. You work during the day, and your bank is open during the day, but you start writing an offer oftentimes 9, 10, 11 o’clock at night. You are going to need assistance from somebody at those hours to say “yes you can qualify for that,” or “yes, we can stretch to $700,000” or perhaps, “yes, we can use the basement suite income,” or “no, we cannot in that city can’t” for whatever reason. There are a multitude of reasons and a multitude of rules that apply to financing.

You banker won’t be available during those hours. We are.

Now, we offer the same product. I always liken us to a Saturn dealership. You come to us, we offer you one price. It doesn’t matter how much money you’ve got, or how much money you earn, you are going to get the lowest rate from us that we can possibly give you because we are under a fiduciary duty, which is to protect your financial best interests. So, the products you are going to get from us, and the rates, are going to be the lowest that we can possibly get.

Now, if I give you a TD mortgage, why wouldn’t you just have gone with TD, as an example? Well we as brokers harness and band together. We harness the power of the many of us within our office, and there are about 15 of us in our office right now. We do hundreds of millions of dollars worth of mortgages a year. So, we come to the table Toronto Dominion, and, you know, Vancity, and all these other institutions; we come to the table with a lot more clout than one client does.  Though they have a $500,000 mortgage, which, to an individual is a massive amount of money; to an institution on Toronto Dominion’s scale it’s not as big. Now if we approach them and try to get that rate negotiated down, well we get volume discounts just as if you bought one thousand widgets instead of one, and you’re going to get a better deal on all of them. It’s the same with us. It’s a discount game. It’s a volume game.

So you’ve got:

1. Service
2. Rate
3. Third party knowledge and unbiased advice

As a broker, and I want to clarify the difference between a “broker” and the guy that is sitting in your TD bank, or RBC bank, or is a mobile mortgage specialist that we see all the time. They are not mortgage brokers. They are individuals that work for the organization and they sell TD or RBC product FIRST, and if they can’t get it done they usually have contacts who are guys like myself  who work with all the other banks and arrange the financing as best they can.

When you are sitting in front of a mobile mortgage specialist that represents one organization, you are NOT dealing with a broker who is offering you that service level, that rate negotiation power, and that unbiased third party advice.

We [brokers] get paid (roughly) the same at every institution. There are some that pay more, and there are some that pay less and we, as brokers, are paid more for longer terms than we are for shorter terms. But, by and large, we are going to be doing what is in your best interests or you won’t use us! So we create that value through service, expertise, and being available whenever you need our help.

So if you are in that situation: you are unhappy with slow, lazy turnaround from your bankers, or you’re upset with the fact that they’re going home at 4:30pm and the don’t even pick their phone up at 4:29pm give me a call and it will be a world of change for you.

It’s Rowan Smith at the Mortgage Centre.

A lot of people think buying a foreclosure is a great way to make a quick buck. It isn’t. It requires industry specific knowledge, and a clear understanding of how the process works. This video blog below explains what goes into the process, and the extra “homework” you need to do before you buy a foreclosure or court ordered sale.

Enjoy!

Transcription of the Video Blog:

Hi Everybody, it’s Rowan Smith with the Mortgage Centre. I want to address buying foreclosures today and why the represent a challenge, especially if you don’t have a lot of cash, i.e., a big down payment and when you are trying to buy with less than 20% down.

When we brokers send an approval up and we look and try and figure out how much you are qualified for, we do so, and assuming you are putting less than 20% down, we have to send it to CMHC. The catch to this is, we need to know the purchase price. So if you find a foreclosure that is listed for $400,000 and you go and take a look at it, and it looks like a fantastic deal. Then let’s say you are going to put 10% down: $40,000. We get you pre-approved for $360,000.

BUT, in a foreclosure you have to be able to go into court on the date that all offers are presented, because it is a public auction, and you have to be able to present a subject free offer; free of ANY conditions. So you can’t say, “subject to financing” or “subject to a building inspection,” etc… No, it’s sold on an “as is, where is” basis. Now why this is important is: imagine you are trying to buy a place, but you can’t get access to the property. After all, the bank is foreclosing on the seller. Do you think the person that is being kicked out of their home is going to allow convenient access, times, and people onto their property? Usually “No,” so you have to be able to get it approved often without an appraisal.

Now, everybody is in the same boat here. The only people that aren’t are pure cash buyers. Guys that are just going to write a cheque or guys that are going to get private financing for maybe 50% (or less) of the value of the property.

So, I had some clients come to me recently trying to get hold of something that was a fantastic deal. The problem is, the guy wouldn’t give them access. They said that they wanted to go in at this price (whatever it was determined they wanted to pay), but we need to be pre-approved beyond that by up to $100,000 because bidding could go up there. We’re going to put 5% down. Now the problem with this, is that we (brokers) have to send a number to CMHC. And CMHC looks at it and goes, “ok, you’re putting an offer of $400,000 in.” They do their own investigation, or internal appraisal, to determine the value of the property. If the property value is there, you are approved assuming you qualify on an income basis.

Now, if you subsequently go to court and the bidding goes $425,000…. $450,000… $475,000 … and you offer $485,000 to get the property and you in the auction now you have to go back to CMHC, and CMHC is going to say, “what happened to the property value? We had it approved at $400,000. We thought that was a fair price. You rae paying $485,000!” In that case, one of two things has to happen:

a. You have to convince them, usually by way of an appraisal (which may not be available), that this property is worth $485,000

or alternatively,

b. You have got to pay the extra $85,000 out of your pocket. Not mortgaged.

So if you are thinking of buying a foreclosure, and you think it looks like a great deal, we need to sit down and go over your financial situation: downpayment amount, income amount, and determine what can you get approved for, and what will this property be approved for.

For The Mortgage Centre, I’m Rowan Smith.

I get calls almost once a day about our “best rates” or “promotional rates” that we advertise. We are forced to advertise these rates because other brokers and banks do, but the reality is that there are often “hidden costs” or rules that apply to these products. Watch this video blog to see how and when these rates (and rules) apply:

Video Blog Transcription:

Hey everybody, it’s Rowan Smith from the Mortgage Centre. I want to talk about some promotional rates and “quick close” specials and “live deal only” specials that you might have seen advertised on my website, on other brokers’ sites, and I want to explain exactly what these mean.

The first thing is, what is a live deal? A live deal is a deal where you have an accepted offer. You’ve had your price is accepted and you have it back in writing that your price is accepted, and you’re in that period of time that you are trying to arrange your financing.

Now a lot of institutions, when they issue a pre approval, they do so and there is a cost to them because they have to “hedge” using financial derivatives to make sure that the rate they’ve promised you today isn’t substantially lower than what they could get sixty, ninety, or one hundred and twenty days from now when you actually write and offer on a place. So when you call me up, or you call your own broker, or you call your bank and they say, “listen, that rate isn’t available for pre approvals, it is only available for live deals,” then that’s being done because this institution has offered a lower rate on the understanding that they only thing they’ll being reviewing and spending time on is a live deal: a deal with an accepted offer.

So, from time to time you’re going to see us post quick close specials and it’s usually 30 to 45 days from the date we (mortgage brokers) submit to the date you complete. So that doesn’t mean you have 45 days to find a place. That means, from the date we hit submit on our computer – and that may be a day or two after your accepted offer depending on how fast your broker moves – you’ve got 45 days to CLOSE on that transaction. For many institutions, it is as few as 30 days. So you need to be on the ball to get your documents in order – I can help coach you with that you let you know what you are going to need to make those deadlines. 30 days is more than enough time to arrange financing on a purchase. The only time it wouldn’t be is if the actual purchase itself is closing further out or if things get bumped back due to mitigating circumstances, or maybe your inspection shows you something else you don’t like, and you need to bump dates back.

So, if you see those (mortgage) offers, give us a call. We can clarify what exactly we are dealing with. In a lot of cases there are also some things you give up to get that ultra ultra low rate. You may give up pre payment priviledges such as weekly or bi-weekly payments. You may give up the lump sum priviledge to pay between ten and twenty percent per year – penalty free – against the mortgage. Before you take oe of these promotional rates, or before you sign into the lowest rate that you’ve see advertise anywhere, find out why it’s so low. There is usually a reason. Sometimes it could be the year end for a particular institution and they are short of their annual targets so they become very aggressive. Other times, it could be exactly what I’ve said before: that it’s a “live deal only” offer with an accepted offer, or that it has to close with 30 (to 45) days.

I’m Rowan Smith from the Mortgage Centre.

Many people call us asking if they can get a mortgage, but they also want some renovation money to do some upgrades to the home. This typically happens when they o a 5% down purchase, and are told that’s the maximum mortgage they can get, but then they want additional funds to renovate or upgrade. There are two ways that someone can get the money:

1. Borrow it on a different credit facility or line of credit (but pay a higher rate)

2. Have the renovation money added to the mortgage in a program called “Purchase Plus Improvements”

The video blog below covers how this program works, as there are several steps and quirks to it. Enjoy!

Transcription of the Video Blog:

Hi Everybody, Rowan Smith from the Mortgage Centre. There is a program that a lot of people aren’t aware of, and that is the “Purchase Plus Improvements” or “getting renovation money” when you try and buy a place. This program has been around for a long time. They are a little “Admin Heavy” depending on your bank, there maybe even more administration that you have to do.

I want to explain how the renovation money works. Especially if you are putting less than 20% down. If that’s the case, putting less than 20% down, you’re going to involve CMHC. So here is how the process would work.

Let’s assume for the sake of argument that you buy a $100,000 home. You want five grand for renovations. What you have to do is get a quite DURING YOUR SUBJECT REMOVAL PERIOD, so before you can even get an approval, you need to get a quote from a contractor that itemizes all the work you are going to have done and an estimated cost.

You will then provide that to me. I will then provide it to the lender. When the lender sends it to CMHC for approval (because CMHC approves all deals – or some mortgage insurer does – with less than 20% down), they’ll look at the purchase price, they’ll look at the value that you are adding by doing these improvements, and assuming they are reasonable, and not too high a percentage of the property value (generally 10% or $40,000 – if you go over that, you may have to treat it more like a construction mortgage). It you are within those confines: trying to borrow less reno money than 10% (which is the case in our example of $5,000 being borrowed on top of a $100,000 purchase price) you’re borrowing about 5%, CMHC will then approve the deal. This assumes you qualify for that bit of extra money.

Now if you think about it though, the Canadian maximum mortgage is 95% financing. So, you will have borrowed 95% (if you are putting 5% down) plus another five grand. You’ve effectively borrowed 100% of the purchase price, so the bank is assuming that you’ve added that value to the property. That’s the whole purpose of the “purchase plus improvements.”

Now, when do you get the money?

You are NOT going to get the cheque cut to you so you can go pay cash to your contractors and get a good deal. You have to pay a contractor to do the work. Or you have to provide all the receipts for all the materials. You can do the work yourself, but there is a heck of a lot more paperwork – and you still need a quote up front from a contractor, even if you don’t use them – you’re going to have to track everything. So when you buy materials, you’ve got to itemize it all, and keep a good running account of it. If they’ve offered to give you five grand for it, they’re only going to give you five grand. You can’t be going back to the trough later on looking for a little bit more.

So, two things:

1. You have got to have the quote up front after writing the offer – when you are trying to get the mortgage approval of all the work you want to have done. This means your contractor is going to have to go through there.

2. The funds will not get released to you right away. You pay interest on them, and they get released to your lawyer or solicitor handling the transaction on the closing date.

3. You have to then go get the work done, and then prove it’s done, either by way of an inspection or by receipts, and this depends based on which institution you deal with. At that time (assuming the work is 100% done) the lender will authorize the lawyer to release the money to you.

So, in summary there, there are three steps, and this is why it is admin heavy.

1. Get your quote. Get the approval. Once you get the approval you buy your home.

2. Do the work. The work has to be paid for somehow: either on your lines of credit, cash, or you’ll have to find a contractor willing to do it on credit for you.

3. Once the work is done, you get the lender’s representative to authorize the release to the lawyer. The lawyer then gives you the money.

It’s a painstaking process, but it’s the only way if you are putting less than 20% down that you can get renovation money.

Alternatively, you can go get an unsecured line of credit, but you’ll be borrowing it at much higher rates than mortgage rates (which are secured). Don’t expect a prime rate personal loan or below prime rate personal loan or line of credit unless it is secured by a mortgage.

So if you know of anyone in this situation: looking for renovation money, I can guide them through the process, explain how it works and try and take some of the mystery out of it because there are so many steps it can be very aggravating.

For The Mortgage Centre, I’m Rowan Smith.