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Understanding mortgage default insurance.

As seen in New Home Guide Metro Vancouver

Mortgage default insurance is commonly referred to as mortgage insurance. It is often mistaken with homeowner/ property insurance or mortgage life insurance. Homeowner/ property insurance protects the individual’s home and possessions in the home against damages including loss, theft, fire or other unforeseen disasters. Mortgage life insurance is designed to repay any outstanding mortgage debt in the event the homeowner death or long-term disability.

home & calclatorThe mortgage default insurance increases the opportunities for homeownership with a low down payment as saving for a 20% down payment can be difficult in today’s housing market. There are two types of mortgage options; conventional mortgages which are loans with a minimum 20% down payment and high ratio mortgages are loans with less than 20% down payment. 

In Canada, mortgage insurance is required by the Government of Canada on all high-ratio mortgages. The insurance protects the mortgage lender only against a loss caused by non-payment of the mortgage by the borrower and it is not a protection for the homeowner. However, the mortgage insurance enables borrowers to purchase a home with a minimum down payment of 5%. 

Mortgage default insurance is provided by insurers such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada and Canada Guaranty. Each mortgage insurer has its own criteria for evaluating the borrower and the property and it decides whether or not a mortgage can be insured. The lender and not the borrower selects the mortgage insurer. It is possible that the mortgage application can be approved by the lender but might not be approved by the insurer. 

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The mortgage default insurance premium is a one-time charge and it is paid by the borrower to the lender. The premium can be paid in a single lump sum at the time of closing or it can be added to the mortgage amount and repaid over the amortization period (or the life of the mortgage). The cost of default insurance is calculated by multiplying the amount of the funds that are being borrowed by the default insurance premium, which typically varies between 0.5% and 6.0%. Premiums vary depending on the amortization period of the mortgage, the loan to value ratio, the size of the down payment and the product.

Example of a premium calculation for a home purchase:

Property value:                                 $400,000

Down payment:                                5% or $20,000

Mortgage basic loan amount:       $400,000 – $20,000 = $380,000

Amortization period:                       25 years

Loan to value ratio:                          95%

Premium amount:                            $380,000 x 3.60%

Default insurance cost:                  $13,680

Total mortgage amount:                $393,680

* The cost of default insurance is subject to change if the purchase price or appraised value, the amount of down payment or the amortization changes. The final premium and the cost of the mortgage default insurance will be disclosed in the mortgage commitment document from the lender.

It is important to note that for insured mortgage loans the maximum purchase price or as-improved property value must be below $1,000,000. The borrowers can port the mortgage loan insurance from an existing home to a new home and may be able to save money by reducing or eliminating the premium on the financing of the new home.

Since there are different products available from individual lenders and are subject to lender’s guidelines, it is important to give me a call so I can analyze your situation, present several options and help you decide which product works best for you.

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Fraud Alert #1: What Happens with Mortgage Fraud – and Why You’re Not Safe

In the first of a two-part series on fraud, outline the red flags for mortgage fraud. As seen in REW.ca

Nowadays, with the amount of information that is shared on the internet and social media, identity theft and Ponzi schemes are happening regularly. Homeowners are taking the necessary steps to protect one of their largest investments, which is their home.

The last thing you want to worry about is yet another way to lose your hard-earned money. But as a homeowner, you need to be aware of crimes on the rise, known as mortgage fraud and real estate title fraud.

In this first part, we will look at mortgage fraud and “straw buyer” schemes.

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Mortgage Fraud

Some borrowers may think that providing false documents and making false statements is not a big deal. However, the Criminal Code clearly states that obtaining funds, including mortgages, by providing false information is a crime.

The most common type of mortgage fraud involves a criminal obtaining a property, then increasing its value through a series of sales and resales involving the fraudster and someone working in cooperation with them. A mortgage is then secured for the property based on the inflated price.

Here are some red flags for mortgage fraud:

  • Someone offers you money to use your name and credit information to obtain a mortgage.
  • You are encouraged to include false information on a mortgage application.
  • You are asked to leave signature lines or other important areas of your mortgage application blank.
  • The seller or investment advisor discourages you from seeing or inspecting the investment property you are purchasing.
  • The seller or developer rebates you money on closing, and you don’t disclose this to your lending institution.

“Straw Buyer” Schemes

Another kind of mortgage fraud is the “straw” or “dummy” homebuyer scheme. For instance, a renter does not have a good credit rating or is self-employed and cannot get a mortgage, or doesn’t have a sufficient down payment, so they cannot purchase a home. They, or an associate, approach someone else with solid credit. This person is offered a sum of money (can be as much as $10,000) to go through the motions of buying a property on the other person’s behalf – acting as a straw buyer. The person with good credit lends their name and credit rating to the person who cannot be approved for a mortgage for a home purchase.

Other types of criminal activity often dovetail with mortgage fraud. For example, people who run “grow ops” or meth labs may use these forms of fraud to “purchase” their properties.

It’s important to remember that if something doesn’t seem right, it usually isn’t – always follow your instincts when it comes to red flags during the home buying and mortgage processes.