Archive Monthly Archives: March 2010
Mortgage Options And Credit Scores
“The Credit Score Can Be All Powerful When It Comes To Mortgage Approvals And Mortgage Rates”
Unlike a few years ago, there is much greater awareness among consumers and small business owners about credit scores and how lenders utilize them to make lending decisions and determine the interest rate they’re going to charge you.
With ads plastered all over the television for free credit report this, and credit monitoring that, the average person can’t help but have a greater appreciation that their own unique credit score is important.
Or do they?
Perhaps its less about our acknowledgment that a) we all have a credit score, and b) that its reviewed by lenders that we apply to for credit and more about a lack of understanding of the actual impact the score can have in real dollar terms.
Much of what you read on the internet with respect to qualifying for a mortgage speaks to the minimum credit score requirements for certain classifications of lenders which is totally relevant to being approved for financing.
But what you don’t see discussed very much is the potential interest rate penalty you’re still incurring even if your lender of choice approves you for a mortgage.
Using the fico scoring scale, a credit score of 650 may be the minimum requirement by a mortgage lender for you to qualify for their program, but it certainly doesn’t guarantee you will receive the best possible rate.
Higher scores have the potential to garner lower interest rates due to lower perceived risk. And even small interest rate discounts of half to one percent can equate to hundreds of thousands of dollars in savings over a lifetime not to mention the additional investment returns that could be generated if these savings were invested over time.
The key point here is to not just be satisfied with getting a mortgage. The goal should be to get the best possible mortgage because the savings over 20 or 30 years can pay for vacations, eduction for your children, retirement spending, etc.
While all lenders will have different requirements, you can be assured that a higher credit score is better than a lower one. And if you personal credit score is lower than 800, there is room for improvement that can result in savings.
By putting the work in to understand where you’re credit is at right now, and the necessary steps to improve it, you’re going to potentially generate substantial benefits over time.
Creative Models For Home Acquisition and Mortgage Financing
“Creative Ways To Acquire a Home and Secure Mortgage Financing in Canada”
Before I get started with this post, I I’d first like to say that I neither recommend or condemn the following two approaches for home acquisition and mortgage financing listed below.
These are options in the market, and like any real estate and financing option, need to be assessed for relevance to an individuals situation and requirements.
Ok, so lets look at some alternative approachs.
The first approach is a “renter” model where a potential house purchaser who is not able to secure financing applies to a rent to own organization for assistance.
There are many variations of this model, but the one I’ve come across the most lately is where the buyer or renter identifies a home they would like to purchase, the renting company qualifies the house under their program and purchases it, giving a 5 year rental agreement back to the interested buyer.
The rental agreement fixes the rental rate for 5 years and includes a banking portion for a deposit so at the end of the 5 year period, the buyer/renter has the right to purchase the property from the renter at a predetermined price.
While this concept is not new by any stretch, the added twist of the new version is the pre-qualification of the buyer/renter at the beginning of the process so that they can be aligned with a home that they will be able to finance and afford in 5 years. The added benefit of some of these programs is credit counseling and credit repair assistance to increase the buyer/renter credit rating to a level that will support institutional financing in 5 years time.
The second home acquisition model I want to discuss is the builder model. In this model, a real estate intermediary works with a builder or group of builders to provide a cash back donation at the end of the building process when the property will be sold for occupation by the buyer.
Effectively, the builder is likely increasing the cost of the home by at least 5% and then offers the increase back to the buyer as a one time donation with no repayment requirements. This provides the cash down payment to secure an insured mortgage provided that the applicants credit and annual earnings support the mortgage requirements.
With the builder model, you may very well be limited to working with one builder and one house design, so this can be a bit restrictive, but will likely vary with each company marketing this type of program.
While both of these models on the surface appear to have some merit for certain individuals, an informed decision to participate or not will have a lot to do with getting into the details and making sure you understand all the related terms and conditions before signing up for anything. You may also want to consider getting legal advise if you’re unsure about the transaction or program requirements.
If you have any questions about mortgage options for these or other purchasing opportunities, give me a call and we will assess your home financing options.
100% Residential Mortgage Financing is Still Available To Canadian Home Owners
“If You’re Trying To Secure 100% Financing For a Residential Home Purchase, Give Me A Call To See If You Qualify For The Available Programs.”
With all the recent changes in mortgage financing programs offered by different lenders, there still is a way to get 100% financing at decent interest rates.
The solution is going to require qualifying for the mortgage insurance offered through the Canada Mortgage and Housing Insurance Corporation (CMHC).
For one or two residential property units, a 5% down payment is required to qualify for mortgage insurance. For three to four unit buildings, the down payment goes up to 10%.
The key to 100% financing is where to get the down payment.
CMHC actually offers three alternatives for coming up with a down payment that doesn’t come out of your own cash resources.
The first option is to receive a one time gift from an immediate family member that is not required to be repaid.
The second option is to finance the mortgage down payment through a lender cash back payment whereby the overall financing commitment is greater than what is required to purchase the property and the excess is used to fund the down payment (not very many lenders will consider this approach however).
The third option, which many people don’t realize, is the use of borrowed funds for the down payment. This can come from any other source, but the repayment requirements of the down payment debt will need to be included in the repayment qualification for the residential mortgage application.
Also remember that to qualify for an insured mortgage, your credit is going to need to be good and your income high enough to cover the repayment requirements.
There aren’t any B lender or sub debt options right now in Canada that provide a 100% financing option at the present time, so the only way to get it done is through an insured mortgage program.
To better understand how any of the above scenarios may work for your situation, I suggest that you give me a call and we’ll work through the various options together and figure out what the best course of action would be for your needs.
Debt Consolidation Loan Considerations in 2010
It May Be Time To Get Serious About Debt Consolidation in 2010 If It’s Been Something You’ve Been Putting Off
If you’ve been reading the papers or watching the news lately, you may have noticed that the financial experts out there are starting to talk about interest rates going back up.
Many economists feel that the interest rate is lower than it should be, but has stayed at current levels for close to a year to protect the economy from slipping into a deeper recession.
Now that things are starting to turn around, there is a good chance we will start to see interest rate increases before the end of the year.
And while even an increase of one percent doesn’t seem like much, it can make a big difference to your annual interest expense when you’re starting at floating rates close to two percent.
For debt consolidation activities, the goal is to combine various outstanding debt together into a new mortgage which will carry a far lower average interest rate. While this will still be possible to achieve regardless of whether or not rates increase, there is the chance that you’ll be cutting into your cash flow longer term by not consolidating sooner than later.
For example, if a family has a $300,000 debt consolidation mortgage today locked in for 3.5%, the annual interest costs, using simple interest math with no principal repayment would be $10,500.
If the consolidation occurred after a one percentage point increase in the three year rate, the increase itself would equate to a 29% increase in your interest payments, or an additional $3,000 which would work out to $250 a month.
So even though rates are still going to be low no matter how much potential increases may be this year, the result is still going to cost you money.
Debt consolidations can involve large mortgage balances which will produce significant interest costs even with small rate increases as the example shows.
The key point here is to not be putting your consolidation plans off. At the same time, debt consolidation is largely about the number and if you can afford to wait and avoid repayment penalties, you may be further ahead by delaying a bit longer.
Just make sure you redo the math every couple of months, and if the benefit is there, you may want to take advantage of it before it gets eroded by any rate increases, or disappears all together.
If you want to review debt consolidation scenarios with me, please give me a call and we’ll crunch through the math together to see what makes the most sense for your situation.
Private Mortgages Can Save Your Business
“If Your Business Owns Commercial Property And Requires Additional Capital For Operations or Lender Refinancing, Our Private Mortgage Financing Solutions May Be
You’re Best Option Right Now”
As we slowly start coming out of the recession in 2010, more and more businesses are trying to either find working capital to help keep the business going, or they’re trying to find a way to payout their bank.
When business down turns occur, cash flow can become strained and bank covenants can get breached.
Weaker financial statements will not likely allow you to get more financing from your bank and if you’re off side with your banking covenants causing your loans to be called, it may be very difficult to quickly move to a similar banking relationship.
When the business owns real estate, the alternative form of financing in many cases is funding via private mortgages.
Private mortgage lenders are less sensitive to bumps in the road and are more concerned with the underlying asset value, marketability, and the future prospects of the business.
The move to private mortgage financing is temporary in nature to allow the business to rebound back to its normal level of operating profitability at which time it will be able to return to a conventional banking situation that offers lower rates.
In many cases, its unfortunate that your bank will not work with you through what in many cases is a short term decline in business. Refinancing is always time consuming and can be fairly expensive, eating into equity you’ve built up over the years.
But refinancing via private mortgages also provides an option, many times the best option, to quickly inject cash into the business and/or payout a lender who is threatening to take legal action against you.
And if you wait too long trying to find a cheaper solution through another institutional lender, you could see the business deteriorate even further and risk greater losses or even business failure.
The obvious benefits of private mortgages are that they can be much faster to secure than conventional commercial mortgages and because the debt servicing requirements are interest only, the higher cost of financing may not result in higher monthly debt servicing payments. In addition, many private mortgages on commercial property are open after three or four months, so if you are able to get the business back on track quickly and locate a more favorable long term financing source, you can payout the private lender without any prepayment penalties after the initial months have passed.
If you’re like many business owners currently facing a cash flow crunch or lender repayment demand, give me a call so that I can quickly assess your situation and provide private mortgage options for your consideration.
Financing Challenges With Large Residential Mortgage Requests
“If You’re Having Trouble Getting Enough Financing For a Larger Home or Income Property Purchase, There Are Certain Approaches You May Be Able To Take To
Secure a Higher Loan to Value Ratio”
When you’re trying to acquire a residential or investment property that’s close to, or greater than $1,000,000, it can become difficult to secure a conventional real estate mortgage for the type of loan to value you may be looking for.
Most of the major banks will apply what they refer to as a sliding scale where they will lend up to, say, 80% of the first $750,000 of value for a single family dwelling and 50% of the remaining value in a “major urban center”.
If the location is more removed from a major center by whatever definition is provided, then the ratios can drop to 80% of $500,000 and 50% of the remaining property value.
Rural areas will see the sliding scale go still lower, requiring substantial down payments to cover the difference between approved mortgage and lending value.
There can also be different sliding scales for rental properties and recreational or vacation properties.
Each lender will have their own policies and procedures for assessing different scenarios and will have their own sliding scales to apply.
And hardest aspect of these conventional mortgage sliding scales is that they will be applied regardless of your personal net worth or level of earnings.
As an example, if you’re earning $800,000 a year and have a $5,000,000 personal net worth or higher, that new cottage property you’re looking at buying for $1,500,000 in a remote area may only attract a mortgage of $900,000, depending on the lending rules of your bank for this type of property in this type of location for this purchase price.
The good news is that there are ways to get higher ratio mortgages and get around these sliding scales. The best way to determine what other options may be available to you is to give me a call so that I can quickly go over your situation, outline relevant options, and help you decide on a course of action.
Private Mortgage Loans Can Save Your Business Cash Flow
Do You Need a Private Mortgage For a Commercial or Residential Property?
For businesses struggling to maintain positive cash flow through the back stretch of the current recession, private mortgage loans can be the best short term financing solution.
If you’re a business owner, you may have found the current recession to be very challenging in 2009. Many Canadian businesses have experienced a drop off in sales and a strain on capital resources as they try to manage through the recessionary slow down effects.
For well established businesses with long term banking relationships, they may find themselves now offside with lending covenants, overdrawn on working capital credit facilities, and getting pressure from the bank for repayment of arrears or even a demand to be paid out.
Yes, despite sometimes having a 10 plus year relationship with a commercial lender, one bad year, especially in a recession, will cause the lender to end the relationship.
With the business feeling there are better days ahead, refinancing is required, or at least additional financing to inject cash flow into the operations. But because of the most recently completed year being sub par, and credit perhaps getting strained, an institutional financing option is not likely going to be available and if it is, it will be hard to find.
When the business owns commercial and/or residential use real estate, the solution more often than not is private mortgage loans.
And while a private lender may look at a lot of the same financial information that an institutional lender does, they tend to be able to look past the obvious bumps in the road and become more focused on the future ability of the business to repay borrowed funds.
From a cash flow point of view, private mortgages are typically interest only, so even at a higher rate of interest, cash flow required for repayment can be quite similar to a conventional bank mortgage due to the fact that no principal is being repaid.
The business will secure private funds for one to two years, allow operations to get back on track, then return to the banks for cheaper money.
This may seem like an unnecessary and costly step for a well established business that’s gone through a tough stretch. The hard reality is that this scenario is playing out almost daily in the early days of 2010 as businesses try to get back on track from a tough 2009.
Private Mortgage Lenders end up being the white knight in many of these situations allowing the business to continue on without disruption.
If you have a business in a similar situation, please give me a call so we can go over your situation together and discuss what mortgage options may work the best for your needs.
Expect Mortgage Rates To Rise in 2010
While the economic recovery is still ongoing, signs from our neighbors to the south indicate that the Fed will be increasing the U.S. based lending rate in the near future.
Canada is expected to follow suit, which will likely see our prime rate go up somewhere between half a percent and one percent over the next 3 to 4 months.
While there is no guarantee of exactly what will happen or when it will happen, the probability is strong that a rate rise could be soon upon us.
At the same time, financial forecasters are not predicting large increases for the rest of the year, but the pattern to upward movements in interest rates now appears imminent as the economic recovery strengthens.
For mortgage holders with floating interest rates, this may be a good time to review your longer term options and consider locking up the current historically low rate levels available for 3 to 5 year terms.
For those of you contemplating mortgage refinancing or debt consolidation, there is still a great opportunity to take advantage of the low rates that have now been in place for the better part of two years.
One of the key things to remember with low interest rates is that when rates are low, small increases can have big impacts on your cash flow.
As an example, a one percent increase in interest rates may not seem like much, but if you’re currently carrying a mortgage with a variable interest rate of 2.25%, a 1.0% increase just saw your total interest payment increase 45%. And if you’re repayment is based on a long term repayment amortization, your overall monthly payment has also increased at least 40%.
While the current low rates have allowed many Canadians the ability to afford getting a first home or upgrading to a larger on, now is the time to look at making sure you’re going to be able to cash flow repayment well into the future by considering locking in the great long term rates we have available today.
If you’d like to discuss long term mortgage rate options or even a mortgage refinancing scenario, then I would suggest you give me a call and I’ll make sure you get all your questions answered.