Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Posts Tagged ‘private financing’

Vendor Take Back Mortgages – More Details…

Tuesday, November 9th, 2010

Transcript of Video Blog:

Hi, everyone, Rowan Smith with the Mortgage Centre. I want to talk today about vendor takeback mortgages. I’m getting a lot more inquiries no them, and there’s a fundamental misunderstanding out there about how they apply and whether or not you can really use them.

A lot of the no-money-down programs, Carlton Sheets and all these other guys that are out there, have been using vendor takeback mortgages. Those programs are predominantly American. Now the technique does work here, but it’s not as simple as people think.

What they’ll often say to me is, “Rowan, I want to buy a $400, 000 house. I don’t have the 5% down, so I want to take a vendor takeback for the 5%.” What that means is that the seller is loaning you the 5% down payment.

Sounds good. The only problem is, it’s not allowed. You can’t do it under Canadian banking systems, because to do 5% down, the person who’s got the first mortgage either has to get CMHC, Genworth, or Canada Guarantee in mortgage insurance, most commonly CMHC.

CMHC is not going to allow you to borrow 5% behind their 95% financing. Part of it’s just simple risk. Knowing that you have absolutely no money in the deal and have nothing to lose if you walk away doesn’t give them a lot of security that you’re going to make your payments.

But secondly, you end up borrowing more than the purchase price. And the reason is, when you pay, put 5% down, you’re going to be looking at a mortgage insurance premium through CMHC for Genworth or Canada Guarantee of anywhere between 2.75% and 3.35%, depending on what program you buy through.

So if you’re looking at 95% financing plus the additional funds for the premium, you’re up at 98% financing. Now you’re going to add your 5% that you’re getting from the vendor. So you’re up over 100% of financing. They’re simply not going to allow that.

And while the math may make good sense, or it may make sense to your realtor or advisor why you can do this, it’s realistically not going to happen in Canadian real estate. I’ve seen too many applications where people have tried to do a vendor takeback, and it’s really considered a dirty word in the industry at this point.

So if you’re thinking of a vendor takeback, the only time you can really do it are on commercial transactions or when you already have a very sizable chunk of money from a percentage standpoint, 20%-plus for example, and are looking to maybe top that up by borrowing a bit back from the vendor.

There are number of ways we can structure this, and I can help you do that. If you have any questions on vendor takebacks, please call me with your situation, let me go through it with you, and we’ll see if we can make it work.

For the Mortgage Centre, I’m Rowan Smith.

Collateral Charges – Another Lender Gets On Board

Thursday, November 4th, 2010

Transcript of Video:

Hi, everybody. Rowan Smith with the Mortgage Centre.

I want to talk today about a change that was announced that’s been swept under the radar, and that’s that TD Bank has announced their mortgages will now be a collateral charge. Now what a collateral charge is, it differs than a traditional mortgage in that you can re-advance that mortgage back up to the amount or even beyond that you originally registered it for.

Now to a client, what does this mean? Let’s look at it from numbers. Let’s say you bought something for $500,000, you put 20 percent down under grant, and you had a mortgage for $400,000. Traditionally, as you paid down that mortgage, you could only advance it ever back up to the amount of the original mortgage, not beyond, and many institutions didn’t allow you to re-advance it at all.

However, a collateral charge allows you to register the mortgage for some fictional figure, perhaps the value of the home plus 25 percent — not the mortgage, but the value of the home plus 25 percent or more. Some institutions, such as Scotia, don’t even specify a limit.

Now, why they’re doing this is twofold. First off, for you the client, yes, it means convenience. What you’re going to be able to do is go back into the bank after a couple of years. You’ve paid your $400,000 mortgage down to $350,000, but let’s say you need $50,000 because you want to renovate. Well, rather than having to break the term and pay legal fees and all this type of stuff, you’ll be able to now just borrow back up to the $400,000, or beyond. If your home is worth more now, based on how much they registered the mortgage for.

It sounds very convenient, but the reality is it’s also a form of golden handcuffs, because once you’re into that type of charge, you can only get out of it by paying off the mortgage and moving it to another institution and paying the legal fees to do so. It’s a way of locking you up with that institution.

Now to anybody that’s had a mortgage for longer than one term, they’ll know that first offer that the bank gives you at renewal is never that great. So if you’re thinking you’re going to move your mortgage or you’re going to shop your mortgage at the end of your five-year term, if you’ve taken the new collateral charges from TD or from other institutions like that, chances are you’re not going to be able to shop it without eating some legal fees in there.

So primarily, it’s a customer retention tool as well as it does, in fact, add value through ease of use and ease of future access to your funds. Myself, I’m not a fan of them, however.

For the Mortgage Centre, I’m Rowan Smith.

Lines of Credit – An Update On A Specialized Product

Friday, October 15th, 2010

Transcript of Video Blog:

Hey everybody. Rowan Smith from The Mortgage Centre. I want to talk today about lines of credit. It’s been a while since I’ve done a post on it. I get a lot of questions on it, people not understanding when a line of credit is possible and what kind of rate they can expect. So first off, when is a line of credit possible? Well, you have to have 20% equity in the property. CMHC does not allow to have people have an interest only portion of their mortgage, so lines of credit are interest only. Typically, prime plus one is the going rate, although your institution may offer you something better if you have a very large investment portfolio or a longstanding connection with them. Prime plus one is the baseline rate by which you should be judging any particularly offers you are receiving for a line of credit. If you’ve got a $500, 000 home and you have a $350, 000 mortgage, you can only have 80% financing, that’s conventional financing, if you’re going to want a line of credit. Now, in that case, that’s $400, 000. If you’ve got 350 and the max is 400, the maximum line of credit you’re going to be able to get is 500. Now, that’s a secured line of credit and secured line of credit rates. Your institution or any other institution can offer you unsecured lines of credit all they want. How big they’ll go is generally an indication of how aggressive their policy is or how much debt they think you can service with your taxable income.

To give you an example of how this plays into it, I had somebody who was looking to qualify for a $50, 000 line of credit but they needed $80, 000 so they went to two different banks and applied for a $30, 000 line of credit and were declined at both of them because unsecured $30, 000 is very large. For secured you can have three million dollar lines of credit if you have the equity in the property, but when it comes to an unsecured line of credit the banks generally have a cap. Anything over $10, 000 and they start wanting to see a lot more net worth, a lot more fall back position, meaning vehicles, meaning cash assets, stocks, RSPs, savings, and what not.

You say, “well, if I had the savings I wouldn’t need the line of credit”, but in most cases people need a line of credit as a contingency, not as the primary source of their funding. There are secured lines of credit with your mortgage, can’t exceed 80% of the value of your home based on the appraisal, not based on list prices of other properties in your area. There are unsecured lines of credit which banks can do whatever they heck they want as long as they believe you and believe your credit rating is strong enough and that your income can service it. If you want any clarification on this, please contact me.

I’m Rowan Smith from The Mortgage Centre.

Divorce and Alimony and the Effect on Your Mortgage

Thursday, October 14th, 2010

Transcript of Video Blog:

Hi, everyone. Rowan Smith with the Mortgage Centre. I want to talk to everyone today about divorce agreements, alimony, child support, and that kind of thing and how they affect your mortgage application. A lot of times people will fill out on their application that they’re divorced. Maybe they are even buying a property with their new partner and the bank will ask them for a divorce agreement. And the person will say to me, but that was 15 years ago. Well, it doesn’t really matter. The bank still is going to want to see that document.

You’re going to have to disclose it. Now, you wonder why that is. There’s a few things that could be in a divorce agreement. For example, there could be alimony, spousal support, child support, any of these different things. Now that monthly payment is just like a debt. It’s just like a car loan. So it’s an obligation which affects your income, your bellied service debt. So a lot of times people will come to me and tell me: how much am I qualified for, I make $100, 000 a year? I spit a number back at them and then when we’re going through the application they inform me they have an $800 a month child support payment.

Well that has a very large impact on what they can approve for. So if you have been divorced tell your mortgage broker upfront if there’s any sort of alimony, child support, spousal support payments or any other continuing payments and obligations for anything you and your spouse may have had together. It may seem insignificant but these institutions are lending you hundreds of thousands of dollars so you can bet darn right that they have the right and will ask for this information. For the Mortgage Centre, I’m Rowan Smith.

File Your Taxes if You Are Self Employed!!!

Tuesday, September 28th, 2010

Transcript of Video:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. Today’s blog post is going to be very brief.

If you’re self-employed, file your 2009 taxes. If you haven’t filed them at this point in the year – and I don’t care when your fiscal year end is; I’m talking about your personal income taxes – file your income taxes.

If you haven’t filed them at this point, chances are I can’t help you. There might be exceptions to that depending on your industry and depending on a number of different factors, but please, call me before writing an offer if you haven’t filed your taxes. It is of paramount importance.

For the Mortgage Centre, I’m Rowan Smith.

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.

Beware Armchair Critics!

Sunday, September 12th, 2010

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith with the Mortgage Centre. I want to talk today about being aware of armchair critics.

A lot of times a client will come to me with a very unique situation like a very hard to do file, and I have to pick and choose very carefully as to which lender will approve it. I go out and get the approval. Maybe the completion date isn’t for a month or two down the line.

In between the time I get the completion and the time I get the approval, I keep getting questions from the client that are odd because I feel like they’re being guided by somebody else, let’s say, “Well, my friend said that they got such and such a product”, or, “My mom said I should only be going with an open mortgage”, or, “My dad said that fixed rates are much lower now, and I should be getting a lower rate.”

All of that may be true for them in their exact situation. You don’t have their situation. That’s why, mortgage brokers are in business is because we know how to look at each individual borrower and set them with a lender and a product that’s the best for their situation. That’s a key point — the best for their situation.

If someone is self-employed and doesn’t declare any income and doesn’t have a great credit score but they have a sizable down payment, not every bank will do that. Not every bank will want that deal.

So if someone got a fantastic deal through Royal Bank, six months ago, has very little bearing on what we can get for them today and what we can get for this different borrower today.

I’m making mention of this because I had a recent situation where a client used to be a Realtor many years ago back in the ’80s and was complaining to me about why they couldn’t use a vendor take-back mortgage.

I’m going to cover that in a separate blog post which is going to follow in a couple of days, but the bottom line is what used to work in the ’80s doesn’t really work now. Especially, this fellow was from the U.S., so stuff that applies in the U.S. markets doesn’t apply here.

The bottom line to this whole post is be careful who you’re getting that information from. Your mortgage broker, myself, is an accredited mortgage professional. I have the AMP designation, which is the highest designation that you can get in Canada when it comes to mortgage origination.

I’ll help you look at your individual situation and get you the best possible deal based on that. I get paid essentially the same no matter where that mortgage goes. There might be small variances, but it’s not enough that it’s going to sway me one way or another.

Besides, I have a fiduciary duty to look out for you and your financial best interests. If I don’t give you the best possible deal and you can just walk in and get a better deal somewhere else, nobody would use me. So of course I’m going to be looking to get you the best deal I possibly can for your situation.

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.