Calgary Rent To Own Explained

In some markets like Calgary, Alberta , it can take a long time to sell a property. An option available to some sellers is the Rent to Own sales method.

    If you have someone interested in purchasing your property but they can’t obtain a mortgage either because they don’t have a down payment saved or their credit score is too low this can be way to purchase a home. Usually the agreements run for 2 – 3 years.

   

A sales agreement is signed which states what the tenant and future owners are going to pay as rent while they save up a down payment and /or improve their credit score. The agreement has to state how much of their monthly payment is going towards the down payment.  They also have to be paying market rents. In addition, the agreement must state that if the deal is cancelled the purchasers will get their down payment funds returned to them.

   The reason that this must be stated in the agreement is that the mortgage insurers like Genworth and CMHC stipulate these terms must be in the agreement before they will approve a mortgage.

What are the pros and cons of this type of an agreement?  The pros are that the tenants will maintain the property and not abuse it as they want to purchase It. The seller gets steady income while the buyer is saving for the purchase. The con is that as the price is determined in advance – radical changes to the local housing market may mean that the purchaser will get a great deal at the end of the agreement or walk away if the market drops significantly. 

   If you are considering this option, consult with a Dominion Lending Centre mortgage professional before you sign an agreement . They  can determine if it will be valid with the mortgage companies and insurers before you’ve spent a cent.

You Don't Need to Cry

Several years ago I had a lady call me and ask me to get her out of her mortgage.  She had a fixed rate mortgage with a home equity line of credit (HELOC) that grew as she paid down her mortgage. I asked her how that was going as many people find they can pay down their mortgages so much faster and they are very satisfied. Her response was not at all happy. She was close to tears.  As her mortgage balance went down and her HELOC increased she would go out and spend more money, on vacations, furniture etc. The result was that after 5 years she had owed just as much now as she did back then. On top of that the person who put her in the mortgage never explained that there was a monthly fee similar to a bank account fee. It wasn’t much but it peeved her that she had not been informed.

  My first question was “ Did the bank rep ask you if you were a spender or a saver?

”no,” she said I’m more of a spender than a saver.”  Now I understood her problem . She was meant to have a regular fixed rate mortgage.  My next question was “ are you paid every two weeks or monthly?  I then showed her an amortization table with monthly payments and bi-weekly side by side and showed her that she could shave 3 ½  years off her 30 year amortization by switching to bi-weekly payments.  What a relief she felt when I was able to put her in a regular mortgage.

    The morale of the story – mortgage brokers ask lots of questions in order to avoid problems in the future. Answer their questions true fully  and you will be happy with the results. 

for more information contact David Cooke - http://davidcooke.ca 

 

99 Year Mortgages and the Power of Amortization

Back in the late 80’s, the Japanese housing market came to a grinding halt. Homes were no longer affordable for your average Japanese consumer. The government came to the rescue with a novel idea: 99 year mortgages. You could buy a house, pay lower more affordable payments, your son or daughter would take over and pay the mortgage down and finally your grandchild at some time close to retirement age would finally pay off your mortgage. Who would want to do this? This was a short term solution. In 2007, we had 40-year amortized mortgages which allowed a great number of people to buy homes who normally would have continued to rent. This created a housing boom, but it made the banks nervous and terms were cut back to 35 years, then 30 and finally back to where they were in 2005 at 25 years. While longer amortizations mean lower monthly payments, the flip side is that you end up paying a lot more interest over time.
Calgary mortgage professionals use amortization as a tool to help their clients at various stages in their lives. Often we use the maximum 25 years to help people get into their first homes. The idea is to get them into home ownership regardless of the cost. Later when they renew we often suggest a shorter amortization if it’s possible.
For example, after paying down a mortgage for 5 years, a couple with a $300,000 mortgage renewing today would be offered a 20-year amortized mortgage with monthly payments of $1659. In 5 years the couple will have paid $40,356 in interest $59,214 in principal and have a balance of $240,785 left on the mortgage.
If the amortization was shortened to 17 years the payment would go up to $1,874.95, an increase of $215.95. but at the end of 5 years they would have paid  $39,365 in interest, $73,131 in principal and have a balance of $226,868.11. In addition, they would now only have 12 years instead of 13 years on their mortgage.
Now, if they are at a stage in life where their twins are going to be going to university or if they need to build a granny suite for aging parents, they may need to lower monthly payments in order to pay for renovations. If they have 20% equity in their home, they could extend their amortization to 30 or even 35 years with some lenders.
Now their monthly payment drops to $1,260 with a 30 year amortization.
And it drops to $1,149 with a 35 year amortization.
Amortization is only one tool that yourCalgary mortgaeg broker can use to save you interest, help you to pay off your mortgage quicker or to lower your mortgage payments. Be sure to call and ask them for help.

Brokers make a Difference

While many people will go to their bank to obtain a mortgage or line of credit they often feel betrayed by their favourite bank if their application is rejected. One big advantage that we have over banks is that we can send underwriter notes along with the application. Our questions and speaking at length with the borrower give us insight that the underwriter will never get from the facts and figures on the application.

 A while ago, I had an application at a lender for a young man who wanted to buy his first home.

He worked in the construction trades and his income history was up and down over the past 3 years. He needed overtime to support his application and the two year average wasn’t there.

I went back with 3 years of Notices of Assessments, his recent pay stubs and pleaded the case for my client. The underwriter finally asked for an exception based on my confidence in the client. She trusted my judgement and the mortgage was approved.

     This leads me to the idea that underwriter notes are very important and can mean the difference between an approval and a decline. If you have a chance, ask your underwriter how they like their notes; in point form or in paragraphs . Do they prefer emails or phone calls?

   When a successful mortgage broker writes notes they start by stating what product they are asking for and giving their contact information. I put my contact info at the top of the notes and at the bottom so they don’t have to go searching for it if they have a question or need clarification.  I then state what my client is trying to do; purchase their first home, refinance, a renewal or if it’s’ a switch, that they want to benefit from lower interest rates.

I then list the areas I want to highlight: Income, Credit, Property , Down payment and start with it their weakest link first and explain their situation. I had a client who had her down payment in a joint account with her father in Japan. I started with that knowing that a paper trail would be important. If the credit score is low, is it due to a past illness, divorce or job loss? I tell the underwriter right away. As  a result, underwriters trust me and have given my clients a second look or asked for an exception.  Finally, I finish up by summarizing the strong points in the file and thanking them for their consideration of my file. 

     I never yell or give my underwriters a blast if they decline a file. I will , however, ask why the file was declined so that I can better prepare my client for the disappointment and plan on how we can remedy the situation.  Just as a FYI,  a manager at a major bank told me that at one bank he worked for after hitting the send key he received a simple message back – either APPROVED or DECLINED with no explanation.  Now who do you think mortgage clients should deal with? A bank or a broker? 
 Contact David Cooke at http://davidcooke.ca 

5 Reasons why you need a home inspection before buying in Calgary

Several  years ago I had a client who wanted to buy a home before he moved to my city. He was in a hurry as he had to get back home. He put very few conditions in his offer to purchase but he did have a financing condition and an home inspection.  A few days later he called me to say the inspector found 10 things that showed him that this house was a former grow op. If he had not had the inspection and found out after he had removed conditions he could have been unable to get financing, home insurance and been stuck with a hefty remediation bill.

     One thing I always encourage my clients to do is get a home inspection. It’s $500 well spent.

You may not be buying a former grow op but there can be costly repairs that you  may have missed while inspecting the home yourself. If you have watched even one home renovation program you know that once the work starts they usually find a surprise or two.

 Here’s a list of the most common faults in homes

Foundation Cracks - the biggest and a very costly item is a cracked foundation. While some cracks in the basement floor are acceptable cracks in the foundation walls need to be excavated and filled which is expensive.

Roof Problems – did you go up on the roof and check the shingles , the pointing around the chimney, etc? Probably not.  Did you check the tresses in the attic? This can be another big repair cost that could be difficult to pay after purchasing a home.

Loading Bearing Walls Removed -  1950’s homes converted to open plan are popular but do you know if a support wall was removed and the roof could end up in your new open concept living area?

Encroachments – are any building, retaining wall ,fence or driveway that extends into a neighbour ‘s property or the City Right of Way. . It was 2 weeks after I moved into my first home that I found out that my retaining wall behind my home was falling into my backyard neighbours’ yard.  Another unexpected repair that I had to handle. 

Electrical or Plumbing Issues – while heritage  homes close to the city centre have character, they also have old wiring that uses fibre insulation. All you need is for a mouse to chew on it and you could have a fire.  Find out how much it will cost to re-wire your home and save yourself headaches down the road.

The same goes for plumbing . It’s old. There’s a chance it could have a slow leak.

     As I said before, it’s always wise to get a house inspection and include this in your offer to purchase. The anguish that you can avoid by doing this is well worth the time and expense. 

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