The question above is a great one, and also one that will produce different answers for different people depending on whom they consult or what website they visit.
Shopping around for a mortgage is an excellent financial exercise because it offers up an opportunity for potential borrowers to confirm mortgage qualification and the best rate with certainty. However, without knowing how lenders qualify borrowers and the limitations of online mortgage calculators, for example, purchasers may receive inaccurate information that compromises not only the home buying process but may inadvertently force them to settle for a property they don't want. BIG BANKS VS. BROKERS: SOME FLAWS One of the main reasons borrowers call a mortgage broker is because they feel the broker channel can bend the rules to their advantage. In reality, it's not about whether or not a broker can bend the rules but rather, that a mortgage broker is highly specialized in mortgages and can employ his or her experience to yield the best results. Additionally, mortgage brokers have access to more than one lender that has more than one product, so this can create significantly more opportunities for borrowers to get the best interest rate, best mortgage product and ultimately, get approved for what they need. For example, big banks will require a borrower who is not guaranteed their hours at work to produce filed income tax documentation for the last two years. On the other hand, a mortgage broker may use a person's year to date income as indicated on their pay stub in conjunction with only the last year's taxes if the numbers make sense. Keep in mind, brokers work exclusively with more lenders who appreciate income not accepted by banks such as the child tax credit and disability income as just a couple of examples. Considering mortgage brokers work with major banks in addition to many other lenders in different lending spaces, borrowers can exercise a high level of due diligence using one mortgage broker they trust with the home mortgaging process. ONLINE MORTGAGE CALCULATORS: THE FLAWS Online mortgage calculators are extremely limited in functionality since they don't incorporate a person's current debt level outside of the hypothesized mortgage payment. Mortgage calculators will use a person's income to service a mortgage payment but won't include the Government-mandated monthly payment calculation on any unsecured liabilities that a person may have. For example, revolving credit must get calculated at 3 percent if it's under $50,000. In contrast, if the balance is over, for mortgage qualifying purposes, the credit facility's balance must be amortized out to 25 years and calculated at the current five-year posted rate. If someone is using a mortgage calculator and excluding necessary financial information as mentioned above, he or she won't receive accurate information about their mortgage approval, which can waste a tremendous amount of time in the search for a home. Therefore, back to the original question: How much income do you need to earn to be able to afford an $800,000 home? The general rule of thumb is you will qualify for up to 5 times your gross income. However, this amount does not consider any other monthly liabilities that you have that once included, will scale back the loan amount. Additionally, if you have more than a 19.99 percent down payment, you can also qualify for a mortgage with an alternative lender that can lend up to 7 or 8 times your gross income amount in exchange for a higher mortgage rate. Therefore, in theory, if you have the minimum down payment, and require a mortgage of $745,000 (plus CMHC insurance premium, which will equal a total mortgage loan of $774,800), you need a gross annual household income of $149,000 CDN. If you have a car loan or student loan along with credit debt, you will require more gross income to service your mortgage debt. Keep in mind that a purchase price of over $500,000 will require a down payment of an additional 10 percent of the amount over the first $500,000. If you have a 20 percent down payment of $160,000, your mortgage will equal $640,000. You will require approximately $128,000 CDN gross household income to qualify, or if you choose an alternative lender, you might only need $91,000CDN. Of course, these calculations also don't include any other liabilities, as previously stated. In conclusion, borrowers should not delay the home buying process or get trapped using the wrong avenue for financing. Pre-approvals through a mortgage expert will ensure borrowers receive the right information the first time. Sarah A. Colucci, Mortgage Agent Lic. M14000929, Mortgage Edge, Broker 10680 Direct: 647-773-4849/Website: www.coluccimortgages.com Want to win $10,000? If you complete a mortgage with me through my "Mortgage with Me" Contest Draw between January 1, 2020, and December 31, 2020, you will automatically be entered into the contest for a chance to win.
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The Purchase Plus Improvements Program allows purchasers to borrower additional mortgage-money above and beyond their approved mortgage amount with the minimum down payment required to complete renovations within 120 days from the closing date of their purchase.
The Purchase Plus Improvements Program is instrumental in home ownership because of how difficult it is for most people to qualify for a moderately priced house in popular urban areas today. In all other circumstances, borrowers must wait until their home appreciates enough to be able to refinance for renovations. Depending on appreciation rates and whether or not borrowers requalify, they may not get an opportunity to make aesthetic changes using mortgage financing. All refinancing is only possible if the mortgage amount requested does not exceed 80 percent of the loan to value and if borrowers can meet lending guidelines once again. Therefore, the program is beneficial for several reasons, including:
How it works using a real example:
Why Don't More Purchasers Use This Program? There is only one main deterring factor that explains why more purchasers don't use this program more often and that is they must front the money for renovations first. The funds for renovations must be one of the standard traditional down payment sources, which include personal savings, RRSPs, a non-repayable gift from an immediate family member, sweat equity, existing home equity or proceeds from a sale. The good news is that the Purchase Plus Improvement Program can be used under the following products:
Eligible Properties include:
The Purchase Plus Improvements Program is available through the broker channel and the lenders we work with also use more forms of income to qualify than banks accept which include the Child Tax Credit and disability income. If you'd like to learn more about the Purchase Plus Improvements Program, please feel free to contact me at (647) 773-4849 or by mail at sarah.colucci@mortgageedge.ca. Sarah A. Colucci, Sr. Mortgage Agent Lic. M140000929 Mortgage Edge Broker 10680 WANT TO WIN $10,000? If you get a mortgage with me from January 1, 2020, to December 31. 2020, you will be automatically entered into my "MORTGAGE WITH ME" Contest Draw. Learn more If the Government won't do it, I WILL!”
As a mortgage professional, it's not only my job to help people get into the real estate market but it's also my job to support and promote homeownership. Therefore, I consider myself an advocate against a struggle arising in the Canadian market for many groups of people including first time home buyers, new immigrants, high-ratio borrowers and so on. I believe that the group of people who were targeted by the Government in an effort to save the housing market from calamity are not responsible for the crises at all. The truth is average Canadians are at a very low risk of defaulting on their mortgage yet with the Mortgage Stress Test in place, many aspiring purchasers have had to abandon any hopes of owning real estate. The Mortgage Stress Test has become nonsensical at this point. Currently, borrowers must qualify for financing at 2% more than the contract rate or 5.19%, whichever is greater. Originally, the test was meant to stop unhealthy inflation. It was meant to save borrowers from payment shock in an increasing interest rate environment and save the banks from a repeat of the US housing crash in 2008. The reality, however, has become much different than it was at the time the Government mandated this qualifying measure. The global and domestic economy has forced the Bank of Canada to keep its overnight lending rate low. Additionally, the bond market has also kept interest rates low and even the Bank of Canada itself has stated over and over again, interest rates will remain low in 2020 due to the rise of populism movements like "Trump" and Brexit which have slowed globalization. In addition to interest rates not climbing which contradicts even having a mortgage stress test, Canadian homeowners have a very low risk of default, as mentioned above. The default rate in Canada is less than 1%. What's even more concerning than the overkill of the stress test is that the advocates, particularly, CMHC, seem as though they've given up on even promoting homeownership as a valuable asset. The President of Canada Mortgage and Housing Corporation, a Crown Corporation, has recently stated that it's perfectly fine to rent and homeownership is not the dream everyone thinks it is. He single-handedly downplayed homeownership which is alarming since CMHC's main role is to promote affordability and fair policies which inadvertently support the attainability of homeownership. My advice is that political failures should never get in the way of sound judgment and of course, reality. Fact: Real Estate Is Appreciating. The Government can use tactful words to try and relieve some of the pressures that only shine a light on its own failures but it cannot change the truth about the overwhelming demand for real estate. If real estate is, in fact, appreciating than that means its a good investment. Plain and simple. My advice? If there is a property that a borrower can afford, even in a suburb, then they should buy it. Buy it now before inflation gets to it! The ONLY instance that renting could ever possibly be a better option is if rent is cheap enough that a person could save a substantial amount of money on a monthly basis that would then be compounded in a high-yielding investment account. In reality, rent suffers the same curve as overpriced real estate. An example of this is the home builders and management companies funding the construction of rental complexes specifically designed to charge "luxurious rental rates." In Toronto, the average priced rental is around $2,400, and that's likely for a one-bedroom condominium that is no more than 600 square feet. Homebuyers can use programs such as the "Purchase Plus Improvements Program" to buy a home that requires renovation but that will also likely increase in value within 120 days because of that renovation. The program allows borrowers to borrow money, increase their property value and complete the goal of owning desirable real estate. As an advocate for Home Ownership, I will work to help people get into the market and I will not be afraid to shine a light on Government policy that is overkill. I will not deter people from the dream of homeownership. I will tell the truth. I will show people the numbers, I will run the calculations. I will encourage people to own real estate. Sarah A. Colucci, Mortgage Agent Lic. M14000929, Mortgage Edge Broker 10680/Direct: (647) 773-4849, www.coluccimortgages.com Want to have a real estate empire? Most people want to be millionaires, have lots of property under their belt and retire in some exclusive resort somewhere. Why don't they? They think building an impressive portfolio is too complicated when it's really not at all.
It may surprise you to learn that approximately 76 percent of Canadians hold their wealth in real estate. The reason is likely because even without having all of the funds available to purchase real estate outright, mortgage financing is still relatively easy to acquire if you have a sufficient income stream, the minimum required down payment and an adequate credit score. And even if you don't qualify for financing via the conventional routes, there is still a plethora of alternative and private lenders who can still lend you mortgage money for investment purposes just at a slightly higher cost. Since the recession that hit the Canadian economy in the 90s, real estate's return on investment has been on an upward trend, outpacing most other moderately-risked investments. For example, a bond mutual fund may only yield a return of 2 to 5 percent for ten years, whereas real estate value in some pockets of Ontario has increased by 10 to 12 percent per year. For example, in 2010, an average three-bedroom home in Newmarket, Ontario, sold for around $430,000. In 2017, the same home would have sold for approximately $1.2M. Today, because of the introduction of the mortgage stress test and foreign investment tax that created a slight correction in market values, the same home will likely still be worth around $900,000. Therefore, even accounting for Government induced real estate depreciation since 2017, its return on investment has still been around 12 percent each year. And so, there are not many people in this day and age who challenge the benefits of owning property or deny the fact that the property they have owned has increased in value, which has, of course, increased their net worth sometimes almost tenfold. Therefore, let us consider astute property investors who have built an empire leveraging both existing equity and mortgage financing to their advantage. In my experience as a mortgage professional, it's not wise for anyone to purchase investment properties with cash no matter how much of their own money, they may be able to access. Most people do not have the cash to buy a property outright, and even if they did, they would be tieing up too much of their money unnecessarily, which would prevent them from engaging in further investments that also didn't require 100 percent of their capital. When it comes to investments, the old saying, "money makes money" holds more weight than ever. Successful real estate investment is about learning to leverage what you have to be able to take immediate action when a good investment comes your way. It's also about using mortgage lending to offset costs and build your empire in a way that allows you to put forward as little capital as possible while enjoying all the profits. For example, you may start off buying a home to live in and only put 5 percent down towards the purchase price. In a couple of years, your property may increase in value enough to be able to refinance your mortgage to access liquid funds. You may use those funds as a down payment on another property that can be rented out and deemed an investment property. You may keep doing this until you own three to five properties. Although this practice of buying, refinancing and buying seems easy, there are other technical aspects to consider, and you must also acquire the knowledge of how mortgage lending works to pull the entire thing off. Setting up your mortgage in a way that allows you to keep qualifying for financing in the future is imperative. It may not be wise to take a fixed-rate mortgage or use a secured line of credit instead of a conventional mortgage as they can unnecessarily inflate your monthly payment on a mortgage application, which could disqualify you for further mortgage financing in the future. Also, when you get to own three or four properties, it becomes increasingly more challenging to get financing, which would put you at an increased risk of having to use alternative or private lenders at a much higher cost. By borrowing at higher costs, you'll compromise your ability to cash flow each month from rental income since your profit margin gets squeezed. Also, there is the issue of capital gains and taxation, which must also be thought through wisely. It would be best if you considered market rents as well as other ways to maximize monthly rental income, whether through long or short term tenants, for example, and the rent that gets charged. Most importantly, you should likely consider consistency in income and your credit and how any changes to either could impact your chance of growing your real estate portfolio. Some professionals overemphasize the intricacies of growing your real estate portfolio, but the truth is it's not rocket science. One of the best courses of action you can take is working with someone who understands mortgages (like a tenured mortgage broker or bank specialist) that can advise you on ways to begin investing in real estate that can reduce any roadblocks in the future that may present themselves as you keep expanding. It's a good idea also to map out a plan that includes your goals about how many properties you want to own in a specific time frame — for example, one property per year and four properties by 2024. You can start working with a mortgage professional right away to find out your chances of fulfilling your goals in the time frame you have set for yourself while also helping you set the foundation for a life investing in real estate. |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Categories |