CREDIT REPORTS: YOU’VE SCORED! BUT ARE YOU PLAYING THE GAME?

For most people, your personal credit score and how a credit score is calculated are complete mysteries. How can you be expected to play and be successful if you aren’t even told the rules of the game? There are things borrowers can do to improve their score so they can access better mortgage products and save thousands of dollars, or qualify for their wonderful home when they otherwise might have trouble. Let’s stick handle through just some of the key things you should know about managing your credit score.

Amount owed and utilization accounts for 30% of your score. There are a lot of people that end up with high balances on their credits cards and struggle to meet the payments each month. If they manage to pay off their credit cards without seeing a mortgage broker to consolidate their debts, often the immediate response is to close the accounts. A better response is to cut up the cards and delete the numbers from your computer and devices and keep the accounts open. You want any remaining outstanding balances to be less than 75% of your total combined credit available, and if they are less than 35%, even better, because this keeps your utilization of available credit low and increases your credit score. Types of credit and the number of different credit products accounts for 10% of the score, so this is another reason you want to keep those accounts open. Cell phone providers are now reporting to the agencies that publish credit scores as well.

In some parts of the world where credit products are not well established, a borrower’s credit is evaluated based solely on how they have managed payments on their cell phone bills. It’s important to pay your cell phone bills on time; we’re all busy, so setup automatic payments to ensure a payment is not missed. My last word of advice for today is to monitor your credit score by purchasing your own credit report each year for about $25 so you know your score and to ensure the report is accurate. This will help you stay within the boundaries of the game.

There is a lot more to managing a credit score than I can get into in this short blog. If you would like to know more, contact me or your local Dominion Lending mortgage broker. We can provide advice to help you manage your credit score and put you in a better position to qualify for a mortgage with better rates. Know the rules of the game, plan ahead for your home financing, and play SMART.

Todd Skene
Dominion Lending Centres – Accredited Mortgage Professional

4 WEIRD THINGS LENDERS ASK FOR

A number of times I have had people who wonder why they need to provide so much documentation when it comes to arranging a mortgage. Besides an employment letter, you are usually asked to provide a pay stub and your most recent Notice of Assessment (NOA) to prove income. “Why do they need all 3, doesn’t the employment letter satisfy this condition?” I am often asked. No, is the short answer.

A pay stub shows your current income and shows how much you have made year to date. This will also show overtime or any special allowances you receive such as a northern living allowance. This confirms or sometimes does not agree with your employment letter. The employment letter shows what you are going to make this year and your NOA shows what you made in the past. It also shows that you do not owe taxes to the government. This is important to lenders because they don’t want the government to put a lien on your property ahead of their mortgage claim on title.

Your realtor will provide an offer to purchase and sale agreement, so why do they ask for a MLS listing sheet? While the purchase agreement shows the financial agreement and what is included with the house, the MLS describes the size of the house and lot as well as the amount paid for municipal taxes and the size of each room. This allows the lender to establish whether you have a fair market price for your new home.

Finally, a lender will ask for a 90-day bank statement to show your down payment money. The reason they ask for this is due to Canadian money laundering laws which need to show the source for all funds and that you have been saving the funds over the past 3 months. If you get an inheritance, you will need to show documentation that this is the source of your sudden wealth.
Be sure to contact your local Dominion Lending Centres mortgage professional before making an offer on a home. He/She can tell you exactly what documents you will need in advance and make the home buying process go much easier.

David Cooke
Dominion Lending Centres – Accredited Mortgage Professional

QUALIFYING MORTGAGE RATE FALLS FOR FIRST TIME SINCE B-20 INTRO

The interest rate used by the federally regulated banks in mortgage stress tests has declined for the first time since 2016, making it a bit easier to get a mortgage. This is particularly important for first-time homeowners who have been struggling to pass the B-20 stress test. The benchmark posted 5-year fixed rate has fallen from 5.34% to 5.19%. It’s the first change since May 9, 2018. And it’s the first decrease since Sept. 7, 2016, despite a 106-basis-point nosedive in Canada’s 5-year bond rate since November 8.

The benchmark qualifying mortgage rate is announced each week by the banks and “posted” by the Bank of Canada every Thursday as the “conventional 5-year mortgage rate.” The Bank of Canada surveys the six major banks’ posted 5-year fixed rates every Wednesday and uses a mode average of those rates to set the official benchmark. Over the past 18-months, since the revised B-20 stress test was implemented, posted rates have been almost 200 basis points above the rates banks are willing to offer, and the banks expect the borrower to negotiate the interest rate down. Less savvy homebuyers can find themselves paying mortgages rates well above the rates more experienced homebuyers do. Mortgage brokers do not use posted rates, instead offering the best rates from the start.
The benchmark rate (also known as, stress test rate or “mortgage qualifying rate”) is what federally regulated lenders use to calculate borrowers’ theoretical mortgage payments. A mortgage applicant must then prove they can afford such a payment. In other words, prove that amount doesn’t cause them to exceed the lender’s standard debt-ratio limits.

The rate is purposely inflated to ensure people can afford higher rates in the future.

The impact of the B-20 stress test has been very significant and continues to be felt in all corners of the housing market. As expected, the new mortgage rules distorted sales activity both before and after implementation. According to TD Bank economists in a recent report, “The B-20 has lowered Canadian home sales by about 40k between 2017Q4 and 2018Q4, with disproportionate impacts on the overvalued Toronto and Vancouver markets and first-time homebuyers…All else equal, if the B-20 regulation was removed immediately, home sales and prices could be 8% and 6% higher, respectively, by the end of 2020, compared to current projections.”

According to Rate Spy, for a borrower buying a home with 5% down, today’s drop in the stress-test rate means:

Someone making $50,000 a year can afford $2,800 (1.3%) more home
Someone making $100,000 a year can afford $5,900 (1.3%) more home
(Assumes no other debts and a 25-year amortization. Figures are rounded and approximate.)
For a borrower buying a home with 20% down, today’s drop in the stress-test rate means:

Someone making $50,000 a year can afford $4,000 (1.4%) more home
Someone making $100,000 a year can afford $8,300 (1.4%) more home
(Assumes no other debts and a 30-year amortization. Figures are rounded and approximate.)
Bottom Line: Almost no one saw this coming due to the stress test rate’s obscure and arcane calculation method (see Note below). This 15 basis point drop in in the qualifying rate will not turn the housing market around in the hardest-hit regions, but it will be an incremental positive psychological boost for buyers. It should also counter, in some small part, what’s been the slowest lending growth in five years.

Note: Here’s the scoop on why the qualifying rate fell. According to the Bank of Canada:
“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use its assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

The BoC explains further:

“Prior to July 15th, we were using April’s asset data to determine the typical rate as that was what was published on OSFI’s website. On July 15th, OSFI published the asset data for May, and that is what we used yesterday to determine the 5-year mortgage rate. As a result, the rate changed from 5.34% to 5.19%.”

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

20 TERMS THAT HOMEBUYERS NEED TO KNOW

Buying a home is one of the most important financial decisions you will make.

It’s common for a first-time homebuyer to be overwhelmed when it comes to real estate industry jargon, so this BLOG is to help make some of the jargon understandable.

To help you understand the process and have confidence in your choices, check out the following common terms you will encounter during the homebuying process.

Amortization – “Life of the mortgage” The process of paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero. Typical amortizations are 25 years or if you have over 20% down payment – 30 years.

Appraisal – An estimate of the current market value of a home. A property is appraised to know the amount of money that a lender is willing to lend for a buyer to buy a particular property. If the appraised amount is less than the asking price for the property, then that piece of real estate might be overpriced. In this case, the lender will refuse to finance the purchase. Appraisals are designed to protect both the lender and buyer. The lender will not get stuck with a property that is less than the money lent, and the buyer will avoid paying too much for the property.

Closing Costs – Costs you need to have available in addition to the purchase price of your home. Closing costs can include: legal fees, taxes (GST, HST, Property Transfer Tax (PTT) etc.), transfer fees, disbursements and are payable on closing day. They can range from 1.5% to 4% of a home’s selling price.

Co-Signer – A person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

Down Payment – The portion of the home price that is NOT financed by the mortgage loan. The buying typically pays the down payment from their own resources (or other eligible sources) to secure a mortgage.

Equity – The difference between the price a home could be sold for and the total debts registered against it (i.e. mortgage). Equity usually increases as the mortgage is reduced by regular payments. Rising home prices and home improvements may also increase the equity in the property.

Fixed Interest Rate – a fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage.

Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS)
a) GDS – Typically mortgage lenders only want you spending a maximum 35-39% of your gross income on your mortgage (principle & interest), property taxes, heat and 50% of your strata fees.
b) TDS – typically, lenders want you spending a maximum 39-44% of your gross income on your GDS – PLUS any other debt obligations you have (credit card debt, car payments, lines of credit & loans).

High-ratio mortgage / Conventional Mortgage – a high ratio mortgage is a mortgage loan higher than 80% of the lending value of the home. A conventional mortgage is when you have more than 20% down payment. In Canada, if you put less than 20% down payment, you must have Mortgage Default Insurance (see below) and your mortgage affordability (GDS & TDS) is “stress tested” with the Bank of Canada’s qualifying rate (currently 4.64%).

Interest Rate – This is the monthly principal and interest payment rate.

Mortgage – A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.

Mortgage Broker – A professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.

Mortgage Default Insurance – Is required for mortgage loans with less than a 20% down payment and is available from Canadian Mortgage & Housing Corp. (CMHC) or 2 other private companies. This insurance protects the lender in case you are unable to fulfill your financial obligations regarding the mortgage.

Open / Closed Mortgage
a) An open mortgage is a flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term, because of the flexibility the interest rates are higher.
b) Closed mortgages typically cannot be paid off in whole or in part before the end of its term. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment. If you try and “break your mortgage” or if any prepayments are made above the stipulated allowance the lender allows, a penalty will be charged.

Pre-Approval – A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines.

Refinance – Refinancing is the process of replacing an existing mortgage with a new one by paying off the existing debt with a new, loan under different terms.

Term (Mortgage) – Length of time that the contract with your mortgage including interest rate is fixed (typically 5 years).

Title – The documented evidence that a person or organization has legal ownership of real property.

Title Insurance – Insurance against losses or damages that could occur because of anything that affects the title to a property. Insurance Title insurance is issued by a Title Company to insure the borrower against errors in the title to your property.

Variable Rate Mortgage or Adjustable Rate Mortgage (ARM) – A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions, the Canadian economy. A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the loan. These types of loans usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

KELLY HUDSON
Dominion Lending Centres – Accredited Mortgage Professional

WE CAN FIX YOUR CREDIT PROBLEMS

Many people do not realize that Dominion Lending Centres mortgage professionals can help you with your credit and get you to a point where you will qualify for a mortgage. We have been doing this for years.

New to Canada or Just Graduated – both of these groups of people have the same problem. They have little or no established credit so lenders are hesitant to lend them hundreds of thousands of dollars to buy a home without a track record. Your DLC mortgage professional can get you a Dominion credit card. You should get a $1,500 limit as that’s the magic number with lenders. A car loan or a personal loan would be a good idea as well. Why? Lenders want to see that you can pay off a debt such as a loan and that you can budget for a revolving line of credit such as a credit card where the balance goes up and down monthly.

Previously Bankrupt or in Consumer Proposal – you had credit and something went wrong. Now you need to re-establish credit. We can help you obtain a secured credit card or help you with suggestions on how to re-build your credit. This can’t be done overnight, but if you are patient and work with us, the end result will be improved credit. Did you know that we have lenders who will pay out your consumer proposal as part of a mortgage refinance? It’s not well advertised but we can do it.

Bruised Credit – these are people who have had credit and then something goes wrong, but we can help. Usually it’s a result of a divorce, a long illness or a job loss. You can go see a credit counsellor for help in improving your credit which will cost you about $6-800 for a year of help, or come see us. We have a program set up by one of the credit reporting agencies that tells you exactly what to pay off first and how much to pay to get the maximum improvement in your credit score. This program costs $17 a month. Your Dominion Lending Centres mortgage professional can get you set up with this .
Instead of being denied a mortgage and told to come back when your credit is better, go directly to your DLC mortgage professional and get help. We’re in the business of helping people.

DAVID COOKE
Dominion Lending Centres – Accredited Mortgage Professional

MILLIONAIRES AND REAL STATE

Andrew Carnagie was one of the richest men in America over 100 years ago. Today his wealth would be worth $4.6 billion dollars. He was a shrewd businessman. While he made most of his money in oil and iron, he understood the value and importance of real estate in building wealth.

Leveraging your money is the key. Leveraging is using someone else’s capital to make a larger purchase. Let’s say you have money to buy a house. You have 2 options:
1- You can use your $100,000 cash and buy a home for this amount free and clear.
2- You can use your $100,000 as a 20% down payment and borrow the rest and buy a $500,000 home.

A year later, if house values have gone up by 5%, a very reasonable amount for many Canadian cities and towns, what would you have?
If you took Option 1, you would have made $5,000 or a 5% return on your money. If you took Option 2 you would now have made $25,000 on your house purchase.
If you are like most Canadians, you don’t have $100,000. You can get into a home with only 5% down. Purchase a $300,000 home with a 5% down payment or $15,000. After a year, with property values going up by 5%, your house is now worth $315,000. You have made a 100% return on your money! Now you can see why people invest in real estate as soon as they can.

Are there any downsides to buying a home as an investment? Yes, if the main industry in your town is announcing layoffs, houses on the market could drop in price and wipe out your profit. But let’s face it, by buying a home you are making yourself your landlord. When you pay your mortgage balance down you are paying yourself. It’s like forced savings. You have to pay the mortgage, so you are forced to save for the future. If you were paying rent, you pay a similar amount of money what do you get in the end besides your damage deposit back? Nothing. We are not all going to become millionaires but we can become wealthier. It’s within the grasp of most Canadians to become homeowners.

If you are considering purchasing a home, be sure to speak to your favourite Dominion Lending Centres mortgage professional first to discuss what’s best for you.

DAVID COOKE
Dominion Lending Centres – Accredited Mortgage Professional

TECHNOLOGY IN MORTGAGES AND REAL ESTATE

Technology is already playing a huge role in the mortgage industry. In the past, mortgage applications had to be physically taken by hand and faxed in (what’s fax anyways?!)… It may soon by possible, with technology’s help, for borrowers to be able to fill out their own application and send it, along with all supporting documentation, straight to lenders without a mortgage professional’s help – kind of scary.

On the Realtor side, there is DocuSign, Realtor.ca, Zillow, and a host of other technology driven solutions that help Realtors be more efficient in their business. However, just like in mortgages, it’s coming to a point where buyers and sellers may see value in going to discount brokerages such as Redfin.

Let’s first look at the mortgage side.

Quicken Loans’ Rocket Mortgage in the States started out as an online-only mortgage application tool. The promise is faster service, with little headache, and everything done “from the comfort of your own home.”

In Canada, Scotiabank just rolled out their eHOME Mortgage application. RBC has had a Pre-Qualification Application for a year and TD rolled out their Digital Mortgage Application in early 2019.

Our own parent mortgage company, Dominion Lending Centres, brought out their “My Mortgage Toolbox” application for Mortgage Brokers to use, and other Broker houses are fast on the trail. All lenders are trying to capitalize on a Millennial’s and Generation Z’s comfort level with providing their personal information to a computer system.

The promise with all of these digital tools is to make a borrower’s mortgage journey easier, and with how technology is progressing, this digital experience is going to keep getting better and better.

Unfortunately, as with any process change, problems arise…

The first and most glaring issue with the digital mortgage experience is that because mortgages are complex, with timelines to follow and anxiety to manage, borrowers are continually requesting human interaction to answer their questions. Rocket Mortgage’s own website now advertises being able to chat online with a specialist right up front.

Secondly, although digital applications promise speed and ease of use, all mortgage files still have to have “eyes” on an application. We’re not there yet (nor will we be for the foreseeable future) where humans do not have to touch mortgage applications for final approval. This human requirement means that a mortgage file must wait in queue to be approved.

Lastly, if any file has the slightest hiccough and doesn’t conform to exactly what the computer systems need to see, an expert will have to be called in during the process to troubleshoot. As an aside, the “experts” who look at these files are salaried individuals; more on that later.

All-in-all, technology alone is not changing the mortgage market.

On the Realtor side, the biggest issue with using Redfin, or relying too much on technology driven companies, is that the Realtors who work there are most likely going to be sub-par… Yeah, I said it… Just like 1% and 2% real estate companies, if someone is working for half the commission, they are, by nature, not going to be as good or competent as someone who prides themselves on working for their due. Don’t get me wrong, there is a time and a place for those 1% and 2% real estate companies (it’s obvious due to them being around) but I believe they are not the best choice for the vast majority of clientele

Additionally, I firmly believe that in life, we get what we pay for. The best advisers and salespeople will gravitate to where they are better compensated. Salaried individuals and discount mortgage and real estate professionals will invariably move to become independent if they are any good. If they are just so-so, bad at their jobs, or are just happy to provide the bare minimum in service, they stay and let someone else hunt for business.

Technology as a Benefit:
There are ways that technology is being used for the benefit of borrowers.

The first is that in our hyper connected world, a borrower’s credit, income, and down payment can all be verified at the touch of a button. Mortgage Brokers can already pull someone’s credit bureau in seconds, and there are also services to allow us to get 3-months of bank statements for down payment verification with a client’s permission. The last step is to have our systems validate income by way of a national employer registry or by other means. In the States, this is done through their IRS and the credit bureau companies and it will come to Canada in the future. All of this means that a borrower can get firm approvals more efficiently (not having to download bank statements, get employment letters, etc.) and it will allow the professionals more time to provide advice and cater to the client’s needs.

The second benefit to borrowers is that the new applications are now able to receive documentation, communicate on application status in real time, and much more, all in one easy-to-use platform. It’s incumbent on the professional to make sure that their technologies and systems are properly integrated to provide a seamless, but better, mortgage experience for their clients.

To recap, technology will be playing a larger and larger role in how mortgages are obtained in the years to come, and in order to thrive in the 2020s, Mortgage Brokers and Realtors are going to have to use technology to the best of their abilities. The marriage between human interaction (building rapport) and providing a seamless experience through leveraging technology should dominate our thinking!

EITAN PINSKY
Dominion Lending Centres – Accredited Mortgage Professional