Home Financing Made Easy - Part Three

By Bruce Smith

Buying a home could possibly be the biggest investment you'll ever make. Your ability to position yourself for the best mortgage will help you pay down this investment early and assist you in becoming mortgage free. In Part Three of “Home Financing Made Easy,” we cover the topics of “Information Required at the time of Application” and “Additional Costs Associated with Buying a Home.” If you missed Part One click here or Part Two click here.

Information Required at the Time of Application

Good preparation means assembling all the documentation you may require to present to your mortgage broker at the time the application, or at some point subsequent to the initial meeting. In today’s environment, many applications are done online so scanned or faxed documents are acceptable. The most commonly requested documents are as follows:

• Proof of person, photo ID, and social insurance number
• Proof of income, employment letter, recent pay stub, three years tax notice of assessment
• A list of assets and liabilities
• Statement of mortgage(s) on a current home
• Proof of down payment, three months of bank statements, gift letter
• A voided cheque
• Lawyer's information

Additional Costs Associated with Buying a Home

There are four different categories of home buying expenses outside of the mortgage.

1. The down payment: Paid at closing this amount will be whatever you agree to with the lender. There are $0 down and “cash back” options available to those who qualify.
2. Closing cost: Paid at closing, these include land transfer tax, legal fees, interest or property tax adjustments, lender fees, and legal disbursements. Lenders typically require you set aside 1.5% of the purchase price of the home to cover these costs.
3. Mortgage insurance premiums: Purchases with a down payment less than 25% require mortgage insurance. This insurance cost is added directly to the mortgage amount so there is no immediate payout required.
4. Pre-closing expenses: Paid prior to the closing, some of these expenses may apply:
   

• Appraisal $250 to $450 if required by the lender.
• Home inspection, $300 to $500. Optional, but recommended, so you're aware of any potential problems with your home.
• Deposit money at the time of offer; $100 to $10,000, held in trust and credited toward your down payment at close.
• Other information that may be requested, such as surveys or water samples, etc., may have additional costs associated with them.

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Bruce Smith is a consultant with Future Group Mortgages and brings more than 20 years of business enterprise development and funding solutions, through an innovative and effective results driven approach. Bruce holds a Bachelor of Business Management Degree, double majoring in accounting/finance and enterprise development. Future Group Mortgages arranges residential, commercial, and construction mortgages. Contact Bruce at 519.649.2502 ext 3 or bsmith@futuregroup.ca.

Published in Networking Today, February 2007

Home Financing Made Easy - Part Two

By Bruce Smith

Buying a home could possibly be the biggest investment you'll ever make. Your ability to position yourself for the best mortgage will help you pay down this investment early and assist you in becoming mortgage free.

In Part Two of “Home Financing Made Easy,” we cover the topic of “Improving My Ability to Obtain a Mortgage.”

If you’ve missed Part One click here.

Improving My Ability to Obtain a Mortgage
Preparation is often the key to maximizing your leverage when seeking mortgage financing. Lenders focus on three main criteria when evaluating an application; credit, collateral, and cashflow. We’ll share some of the secrets that will help you when dealing with lenders.

1. Credit
Your personal credit score will determine your ability to obtain the best rates in the marketplace. Quite simply, the higher your score is, the lower your interest rate will be. Your score is determined by a number of factors, including your payment history, amount of your credit balances compared to the limits, length of credit history, number of inquiries on your report, and types of credit in use.

Payment history
Each time you are late or miss a payment, it is noted in your report and is detrimental to your score. It is better to make a token payment if you do not have the funds to pay off the balance or make the minimum payment due. The last two years of your credit history will be given greater consideration.

Amount of your credit balances compared to the limits
If you are planning on shopping for a mortgage, your best strategy is to pay off all outstanding credit balances and not use your credit for about 45 days prior to your search. This will provide enough time for your balances to clear the system. If you cannot pay off the outstanding balances your next best strategy is to pay them down to at least 60% of the credit limit.

Length of your credit history
The longer you have demonstrated the ability to manage your credit, the higher your score.

Number of inquiries on your report
Frequent requests for credit are often an indication of problems in terms of need or in terms of being turned down by previous lenders. One of the advantages of using a mortgage broker to assist in financing, beyond superior rates, is that a broker will only pull your credit report once.

Types of credit in use
Credit lines that are unused are of no value. The more you demonstrate the ability to manage your debt the better your score

In Canada, credit scoring is handled by two credit reporting agencies. To obtain a free copy of your credit history by mail, contact the credit bureaus below by phone or online. If you wish to download your credit report online a $15.00 - $25.00 fee will apply.

Equifax – 1-800-465-7166 www.equifax.ca

Trans Union – 1-866-525-0262 www.transunion.ca

2. Collateral
Collateral is a term for the amount of down payment that you are prepared to offer on a property. A 25% down payment of the purchase price eliminates the need for your mortgage to be insured by CHMC or Genworth as required by most lenders.

3. Cash Flow
Cash flow is commonly referred to as income. Lenders typically require that your housing payments are no more than 32% of your income. A second ratio lenders consider is your total debt service ratio. Additional debt such as credit cards, lines of credit, car payments, and child support payments, etc. are added to your mortgage debt. All your debt payments combined, are to be no more than 40% of your income.

There are many types of acceptable income but generally you will be reporting either employment income or self employed income. If you are an employee, you should have worked with your current employer for a minimum of three months and be able to produce an employment letter and a current pay stub to verify employment. Lenders look to verify salary, position, and length of employment. When planning to purchase a first home it is not the time to be switching jobs. Lenders like to see steady employment.

If you are self employed, lenders look for a three year history. Notices of assessments are the preferred choice to verify employment income as it provides the lender with your income and verifies that your income taxes are current. If you are self employed and unable to verify income, there are mortgage products accessible to you as well, but you will pay a premium rate or you will require a higher down payment.

Read Part Three: Information Required at the Time of Application

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Bruce Smith is a consultant with Future Group Mortgages and brings more than 20 years of business enterprise development and funding solutions, through an innovative and effective results driven approach. Bruce holds a Bachelor of Business Management Degree, double majoring in accounting/finance and enterprise development. Future Group Mortgages arranges residential, commercial, and construction mortgages. Contact Bruce at 519.649.2502 ext 3 or bsmith@futuregroup.ca.

Published in Networking Today, January, 2007

Home Financing Made Easy - Part One

By Bruce Smith

Buying a home could possibly be the biggest investment you'll ever make. Your ability to position yourself for the best mortgage will help you pay down this investment early and assist you in becoming mortgage free.

What Can I Afford?

When you begin the home shopping process it helps to know your purchasing power. Otherwise, you can easily waste time looking at homes priced above or below your means. Avoid disappointment by having your mortgage broker assist with a prequalification or formal lender pre-approval. The information that is factored into your financing equation includes:

• Income

• Credit history

• Amount of proposed down payment

• Total current debt

• Current interest rates

• Estimated taxes and heating cost

Once this information is assembled and reviewed, your mortgage broker will provide you with an idea of what you can afford. An application may be filed as a means of introducing you to the lender and indicating that a purchase and sale offer will be forthcoming.

You can visit the Future Group Mortgage Web site at www.futuregroup1.com for links to mortgage calculators, which will assist with the prequalification process.

Choosing the Mortgage Best Suited for Me

Today’s buyers have an unlimited financing options to choose from. If you are wondering which loan program is right for you, you’re not alone. The right loan depends on your family situation, finances, tolerance for risk, investment strategies, and how long you plan to own the home. Questions to consider are:

• Do I expect my current income to significantly change over the next five years?

• How much do I have for a down payment?

• Do I have family that can assist me if required?

• Can I tolerate possible increases in interest rates to achieve an overall lower rate over time, or would I sleep better with a fixed monthly payment?

• Do I want to pay off my mortgage quickly or would I prefer to take any extra money and direct it to other investments?

• Do I plan to move in the next five years?

Armed with this information, your mortgage broker will be able to direct you into the best mortgage product for your unique situation.

Read Part Two: Improving My Ability to Obtain a Mortgage

Read Part Three: Information Required at the Time of Application

Part Three coming in February 2007: Additional Costs Associated with Buying a Home in February

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Bruce Smith is a consultant with Future Group Mortgages and brings more than 20 years of business enterprise development and funding solutions, through an innovative and effective results driven approach. Bruce holds a Bachelor of Business Management Degree, double majoring in accounting/finance and enterprise development. Future Group Mortgages arranges residential, commercial, and construction mortgages. Contact Bruce at 519.649.2502 ext 3 or. bsmith@futuregroup.ca

Published in Networking Today, November, 2006

Financing Commercial Properties

By Bruce Smith

First time buyers of businesses, commercial properties, and income producing properties often hear about the competitive residential mortgage market, where buyers can purchase homes for no money down or at rates below prime. However, commercial properties are not subject to the same rules.

Are you buying assets or shares?

Typically, when you purchase a business you are purchasing the entire company (shares of the business), or the assets of the business (building, equipment, inventory, name, goodwill, etc.). It is important to understand this distinction.

Sellers want to sell shares for the tax advantages and because all liabilities associated with the business will transfer to the buyer. On the other hand, buyers like to buy assets to avoid assuming unforeseen liabilities and to make financing easier.

Lenders look for security in hard assets, such as buildings or equipment – things they can take repossession of and re-sell if required. You may have to find multiple lending sources to secure the necessary financing. The lender, which holds the commercial mortgage on the building may have no interest in lending against other assets and may have less interest in soft assets, such as goodwill or working capital.

When is a commercial property not a commercial property?

If you purchase an income producing residential property of four units or less, it may be possible to make the purchase using typical residential mortgage conditions. Each lender has specific eligibility conditions so it’s best to have a mortgage broker review your options.

Conversely, a single family home may require commercial property financing if a zoning variance has been granted to allow special business use (such as a hair salon) for home operation. Homes containing traditional home based businesses that meet the conditions of local municipal by-laws and have not sought a zoning variance can continue to be financed as residential.

Credit considerations

If you’re buying commercial property through your own existing company, both your company’s credit and your personal credit will be checked to determine eligibility. Plus, your creditability as a landlord or business owner will be reviewed, evaluating your experience and success in managing current and past businesses – creating a borrower profile.

Income considerations

Lenders like to examine financial statements from the previous owners to determine revenue and expenses associated with a commercial property. It should be evident that sufficient income exists to service the new debt.

If you are taking over the property for a new use, for example, you are moving your business into the space; lenders will review your previous financial statements and future business projections to determine if your business earns sufficient income to service the debt. If you plan on leasing the property to existing tenants, then current lease agreements will be required.

Loan to value

Often the biggest hurdle in financing a commercial property is the maximum loan to value (LTV) or the loan you can receive in relationship to the value of the property. The maximum LTV allowed is determined by your credit history and the type of property you’re financing.

Properties with a residential component do best (85% for apartment buildings), while properties with environmental concerns (manufacturing, gas stations) or businesses with poor success rates (restaurants) typically LTV much lower.

The good news is that when establishing the value of a commercial property, lenders often value beyond the bricks and mortar of the property. Lenders give consideration to the cash flow generated from a property as part of the total valuation.

The bad news is that this form of commercial property appraisal is expensive when compared to a residential appraisal. Given the lower LTV ratio for commercial properties, vendor take back (VTB) financing is often used in conjunction with traditional lender financing.

In an effort to assist in the sale of a property or business, existing owners are often asked to finance in a subordinate position to other lenders. There are no concrete rules behind such lending so terms, interest rates, and conditions vary greatly from deal to deal.

Geographical considerations/environmental assessment

Lenders prefer urban areas to rural areas. Expect some form of environmental review as part of the lender’s due diligence. Properties with possible exposure to contaminants would be subject to additional review.

Interest rates

Interest rates are calculated from the net effect of everything mentioned including credit, income, and loan to value. Commercial rates are traditionally higher than residential rates due to the added risk associated with business failures, potentially long vacancies, and the inability to quickly resell the property in the event of foreclosure. The size and quality of the deal will also influence rate, as premium deals attract more lenders and lower rates result.

It is always wise to contact a mortgage broker that deals in commercial mortgages to review your documentation, package your deal, shop the market, and arrange the best financing for you based on your unique circumstances.

Bruce Smith is a consultant with Future Group Mortgages and brings more than 20 years of business enterprise development and funding solutions, through an innovative and effective results driven approach. Bruce holds a Bachelor of Business Management Degree, double majoring in accounting/finance and enterprise development. Future Group Mortgages arranges residential, commercial, and construction mortgages. Contact Bruce at 519.649.2502 ext 3 or bsmith@futuregroup.ca.

Published in Networking Today, November, 2006