From Home A to B: Use Bridge Financing to Get You There

General Victor Anasimiv 28 Nov

Maybe you’ve met your soulmate and it’s time to move out of your studio apartment.  Perhaps baby #2 is on the way and your 2-bedroom starter home is starting to feel a bit cramped.  Or maybe you’re retiring to a big sprawling acreage in the country. Whatever the reason, it’s time to purchase a new home.  In a perfect world, most people would want to have possession of their new home before the current one sells.  The overlap allows time for painting, touchups and other renovations.  Life is not perfect though.  Unless you can qualify and afford to pay two mortgages, typically, the down payment for the new purchase is coming from the sale of the current home.  If the sale closes after the purchase and funds are needed in the interim, that’s where bridge financing comes in.

Bridge financing allows you to bridge the financial gap between the firm sale of your current home, and the firm commitment to purchase your new home.  The key word here is FIRM.  In order to secure bridge financing, all subjects must be removed from the sale.  Without a firm sale, a lender can’t accurately determine how much equity you have available to go towards the new purchase.

You will want to make sure that your new lender is a lender that does in fact offer bridge financing.  And that’s the benefit of working with a mortgage broker.  I have access to a wide array of lenders, as well as first-hand knowledge of which lenders will offer bridge financing.  The cost of bridge financing can vary between lenders, but has two components: an administrative fee plus interest charged on the loan.  The interest rate will be higher than for a traditional mortgage, but you’re paying for the convenience, and ideally the bridge financing will only be in place for a short period of time.  You can expect a rate somewhere around prime + 2 to 4% (prime = 3.2% at the time of this writing).  The maximum term of the loan will also vary from lender to lender, but is typically between 30-90 days.

Upon approval, the bridge loan proceeds are advanced “in trust” to your solicitor, along with instructions from the lender to ensure that the required net proceeds of sale of the existing home are directed back to the lender to repay the bridge loan.

Now, what happens if your home doesn’t sell?  That’s why the lender requires a firm sale agreement with subjects removed in order to qualify for a bridge loan.  If you don’t have a firm selling date and can’t wait any longer to complete the purchase, you may need to explore private financing.  This option can be more expensive as there are lender and broker fees charged and the interest rates are much higher.  Though expensive, it could be cheaper than lowering the sale price of your existing home just to get the sale.

 

No two mortgages are created equal, and this is even more true for bridge loans & private financing.  There are a lot of differences between lenders and it can take a lot of work sorting through everything.  Save your time and get a mortgage broker like me working for you.  If you have any questions about bridge financing, or any other mortgage-related questions, give me a call today.

Home Inspection – Definitely worth the money!!

General Victor Anasimiv 14 Nov

When purchasing a residential property, one of the more common conditions seen in a purchase contract is the buyer obtaining and being satisfied with a property inspection, which should be conducted by a certified home inspector.  The inspector’s job is to provide information about the building being purchased. This information helps the buyer decide if the home or building is worth purchasing or if there are major defects that could effect the purchase decision negatively.  A thorough home inspection will cover almost every aspect of the home and any other buildings on the property.  Structural elements, roof, full interiors & exteriors, & plumbing, electrical & heating systems are some of the components that should be inspected.  Even the attics & crawlspaces will be inspected by a good quality inspector.

Upon completion, the inspector should provide you with a thorough report, complete with pictures, that has a section devoted to each system or structure in your home.  If there are any deficiencies, they would be noted here, as well as how severe they are and how they can be remedied.

As far as protecting the buyer’s interest, a thorough home inspection is probably one of the most important steps when purchasing a home.  But unfortunately, they can be overlooked in a buyer’s rush to get an accepted offer.  Take for example, the bidding wars on residential properties currently happening in Canada’s largest cities.  Prospective buyers have been forfeiting their right to a home inspection as they place subject-free offers in order to avoid rejection.  Yet giving up your right to a home inspection could potentially result in repairs that could cost thousands of dollars.  This is a mistake that can easily be avoided.

An inspection is important whether you’re buying your own home or even an investment property.   An investment property should be making money, not losing it.  It would be unfortunate to purchase a rental property with no inspection done, to find out a couple months later that the roof needed to be replaced.

Similarly, for sellers, pre-listing inspections can be just as beneficial.  They can be used as a bargaining chip.  If a seller gets an inspection done beforehand, they may be able to get a higher asking price.  If any deficiencies arise, the seller can decide if they want to repair it or not.  Even if they decide not to do the repairs, being transparent about any issues could provide additional negotiating power.

As with any service, it’s good to shop around.  Have a quick chat with a couple inspectors.  Ask your realtor to suggest a good referral.  Compare fees.  Regardless, make sure you get one if you’re purchasing a new property.  In the long run, it will probably pay off.

 

Self-Employed? Here’s What You Need to Know About Mortgages.

General Victor Anasimiv 2 Nov

According to Stats Canada, more than 2.7 million people in Canada are self-employed, or business-for-self (BFS).  Entrepreneurs serve an important function in our economy.  Successful self-employed people are typically very hard workers.  After years of working long hours to save up enough for a down payment, BFS borrowers might assume that the mortgage qualification process for them would be identical to the process for anyone else.  But nothing could be further from the truth.  It’s important to know, in advance, what additional hurdles you might face.

Prior to 2008, BFS applicants could obtain a mortgage simply by proving they had a business with an active business license (and good credit, of course).  Their income could be stated arbitrarily, as long as it was realistic for their industry.  Since then, mortgage regulations have progressively tightened, especially on “stated income” loans.

Here’s what BFS-er’s need to know!

First of all, if you have a history of provable income, everything is fine.  Has your business been active for at least 2 tax years, claiming enough income on your taxes?  If your 2-yr Total Income average (line 150 on your tax returns) is sufficient to qualify, it’s business as usual.  You qualify just like an employed borrower and generally have access to the same mortgage products, rates and terms.

Many BFS clients we deal with have been encouraged by their accountant to write off as much of their income as legally possible.  By claiming legitimate expenses and personal deductions, you can artificially lower your total income, thereby reducing the amount of taxes payable.  That’s great at tax time, but if you plan on applying for a mortgage in the near future, you’ll want to rethink this strategy.  In order to qualify for best rates, lenders will look at your line 150 – Total Income, not your gross business income.  If you earn $100K a year but write your income down to $40K, that $40K figure will be the one lenders accept as qualifiable income.

Some lenders allow “Grossing Up” of your total income.  Rules vary, but usually you can add 15% to your 2-yr average income and still have it considered qualifiable income for best rates. For example, if your 2-yr average Line 150 income is $65,000, a lender who allows “grossing up” will use an income of $74,750 for qualification.  In some cases, this bump may be enough to meet debt servicing requirements.

If not, another option is to qualify for a “stated income” mortgage.  The stated income must be realistic as determined by the lender, usually based on the type of business, the industry sector and time in business.  The 2-year minimum rule is still typically in play and lenders usually won’t allow a borrower to state their income higher than their recent annual gross business income.  “Stated Income” interest rates are nominally higher, by about 10-15bps (0.10-0.15%).  Monthly mortgage payments will be about $5-8 more for every $100K owing.

While this can help get you qualified, there are additional conditions involved with “stated income” files:

  • your credit profile must be squeaky clean.  It’s OK if you owe money on your cards or lines of credit, but it’s best if you keep your balances as low as possible.  Every $12,000 in consumer debt will decrease your maximum mortgage by about $100,000.  It makes a big difference.  Plus, if balances are close to the limits, this will really drag your overall credit score down.  Most importantly, stay on top of your payments.  Missed payments, especially on previous mortgages, will stick out like black eyes when a lender examines your credit worthiness.
  • pay your taxes!  Anything owing to Canada Revenue Agency comes first.  If you owe a lot of back taxes (GST/HST included), a lender will take a pass on your approval until taxes are brought up to date.
  • more down payment/equity may be necessary.  Usually the required down payment is 20% to avoid mortgage default insurance.  With “stated income” files, this minimum jumps to 35%.  There are always exceptions, but the exceptions are usually granted by private or B lenders, who charge higher rates and additional lender fees.  At a minimum, you will need a 10% down payment.

In preparation of getting approved for a mortgage, as a self-employed borrower, you have a bit more homework to do compared to the typical income earner.  Start collecting your documents now.  A lender will likely ask to see many of the following:

  • T1 Generals & Notices of Assessment (NOAs) for the previous 2 years.  The T1 General is the tax booklet submitted at tax time and the NOA is what Canada Revenue Agency sends back to you.  If your T1 Generals included a section called ‘Statement of Business Activities’, make sure that’s included.
  • proof that you have paid any income taxes owed, as well as any HST or GST owing
  • financial statements for your business for the last 2 years prepared by an accountant or other qualified 3rd party
  • copy of your business license and/or article of incorporation

These days, the mortgage qualification rulebook is constantly being re-written, especially if you’re self-employed.  It’s important to make sure you’ve thought of everything in advance to avoid any last-minute surprises.  That’s where having a knowledgeable mortgage broker works to your advantage.  If you have any questions or just want some more info, give me a call today – 250-338-3740