By Gareth R. Jones
When the decision to purchase a home has been made and the process begins, there are a multitude of options to be explored. For most people, buying a home is the largest single purchase that they will ever undertake. Information is gathered, desired location chosen, then price, size, style, age, property condition, timing, features and amenities etc. are prioritized. The process can be a long, tedious, sometimes frustrating experience and usually requires compromising something to meet the house and budget limitations. At the end of the day, when the Offer goes in, the Buyers nowadays make a very educated housing decision.
The Mortgage for most people is the largest amount of money that Buyers will ever borrow and for the longest period of time. Why is it that this Mortgage financing is generally researched less than more minor purchases such as a computer, car, vacation, TV, home improvements or appliances?
It is natural to be extremely attentive to the physical structure of your house to ensure that there are few surprises or disappointments. Why is it then, that Buyers are less attentive to the structure of their Mortgage? Generally, Buyers will automatically visit their home banking branch for a pre-qualification/approval and rely on their seemingly important, long term loyalty and relationship with their lending institution to ensure the best possible service, terms and rates available. Rarely is a second or third opinion sought.
It is also assumed that the person taking the Application is well qualified, experienced and always has the clients best interests in mind both for their long and short term needs. Front line employees do try very hard to meet the needs of clients but generally lack the experience, options and expertise found through a Mortgage Broker/Agent. They are further hampered by having only one source, limited flexibility and extremely strict guidelines to follow.
Here are some “Points to Ponder” about Mortgages and Credit:
- Credit Agencies provide Beacon or Bureau scores to Lenders and Lenders rely heavily on this score when making any lending decision. This score is established based on the individuals reported activity and history. Most Mortgage lending criteria and options available are based on this score. How accurate is this information? How often is it checked and corrected?
- Front line institution employees are generally performance rated on amount and type of funds managed and this will be reflected in their annual compensation. This encourages maximizing of loan amounts provided the guidelines are met.
- Making several applications for any credit over a short period of time gravely impacts your score. Example: Visiting 3 different banks and completing 3 different applications, pulling 3 credit reports for same mortgage.
- Revolving credit, such as credit cards, lines of credit etc. have a larger impact on your score than fixed repayment credit.
- Exceeding 60-75% of your assigned credit limit will also lower your score. An example of detrimental scoring is the person who has a large Line of Credit instead of a Mortgage and making interest only payments, thereby showing credit continuously at maximum of 100% and funds available of zero.
- Has the suitability of the Mortgage product been customized to your needs for the entire term of mortgage? Have future lifestyle changes been ignored?
- Lenders vary across the board in criteria. Many have different score requirements, privileges, lock-in policies, discharge fees, self-employed programs, self-stated programs, rates and terms. Many also offer rate sales for limited times with certain types of mortgages, not available through branches. Often a Lender will distribute a rate sale valid for a short period of time for minimum amounts, provided Borrower meets certain criteria.
- Most Lenders pay the finder’s fee or commission to the originating Mortgage Agent/Broker’s company directly thereby eliminating any additional costs to Borrower.
- Mortgages to banks, represent a very small portion of their overall business and also yield the lowest profit of most services offered. With this in mind, having the front line branch staff fully educated and qualified is too expensive, time consuming and provides a less productive return than other vehicles.
- Did you know that the Lending Value for a property is the lesser of the Appraised Value and purchase price? Most appraisals are now conducted electronically by area, eliminating the need and cost of an actual site visit by an Appraiser? Are all properties fairly represented using this approach?
- Did you know that for Mortgage qualification purposes that a couple without children is treated as having almost the same disposable income as a couple with four children? Alimony payments are also treated differently than income from alimony payments.
- Did you know that for Mortgage qualification purposes that only monthly principal, interest, property taxes and heat (condos + ½ of maintenance fees) are considered when calculating Gross Debt Service Ratios? Property, car and life insurance, hydro, water, phone, cable, fuel, travel, car and house repairs, improvements and many more costs are not factored.
- Did you know that for Mortgage qualification purposes that only 3% of outstanding revolving credit balances are factored into monthly affordability calculations for Total Debt Service Ratios? An example: A couple with $7,000.00 total in outstanding LOC/credit card debts has available payment funds for the Mortgage calculation only reduced by $210.00 per month.
- Did you know that Mortgage Broker/Agents have access to many alternate Lenders offering at least the same or often better rates, terms, privileges and services? Lenders also know that when a deal is submitted by a Mortgage Broker/Agent, there is a greater risk that the deal will be taken and “shopped” elsewhere, if the Lender does not meet or beat the competition.
To improve your position and score now and in the future, look at the 5 C’s Lenders look at when making any credit decision first and foremost:
- Capacity is the ability to repay the principal and interest on the loan.
- Capital is the Borrower’s financial status/net worth.
- Character is the integrity of the Borrower.
- Creditworthiness is the borrowing track record of customer.
- Collateral is the security taken to provide support.
Hopefully this brief overview has been informative and will be helpful in guiding you in the decision making process.
You have heard the popular expression, “location, location, location” when purchasing real estate. In mortgage financing the expression is, “amortization, amortization, amortization!!!”
Gareth R. Jones A.M.P. is a Mortgage Agent with Home Loans Canada-FSCO Licence #10423 (the Brokerage arm of CIBC Mortgages, Lending and Insurance. FSCO License #M08009150. Gareth can be reached at Gareth.Jones@HLCmortgages.com.
