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What Happens When Financing Falls Through?

If your mortgage approval is rescinded at the last minute, your purchase could be in jeopardy. Here’s how to fix it. As seen in REW.ca

Q: I’m buying an old house, and the offer subject to financing. But what happens if the bank doesn’t approve the house and my financing falls through at the last minute?

A: If your financing falls through at the last minute, we would advise to get an extension on your subject removal date and not remove subjects until your financing is in place.

When you put an offer to purchase a home, you are saying that you will be buying the home provided all the conditions are fulfilled prior to you giving a deposit. Those conditions are commonly refer to as “subject,” such as subject to inspection, review of the strata minutes, financing, etc. During this time you will do your due diligence along with your real estate agent and mortgage expert via the lender. Prior to putting an offer, you would have been pre-approved or pre-qualified. While the lender might have approved you, they have still not approved the property you are purchasing.

Once you have an accepted offer the lender will issue a commitment letter agreeing to approve your mortgage provided you can fulfill the financing conditions. Some of these conditions include income confirmation, source of down payment, appraisal (if required), and approval of property such as property disclosure statement, strata minutes, Form B, etc. It is critical that the lender reviews and approves all of these documents before removing subjects. There has been cases where the lender has no issues with the borrowers but has issues with the property and therefore will not approve the financing.

When you work with a bank you only have one option, but when you work with a mortgage expert because we have access to multiple lenders if one lender doesn’t approve the mortgage, then we are able to go to another lender. This will save time and stress to the client. We have seen many situation in which the lender is not comfortable with the property so, in order to get financing with other lenders, an extension of one or two days is required to ensure all financing conditions are fulfilled and the client feels comfortable in removing subjects.

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Mortgage insurance rates are raising

If you are planning to buy a property with less than 10% down payment expect to pay a bit more. As seen in Metro Vancouver New Home Guide.

CMHC and Genworth have announced that starting June 1st, all homebuyers that are putting less than ten per cent will be paying a higher mortgage default insurance. This is commonly referred to as simple “mortgage insurance”.

The mortgage default insurance increases the opportunities for homeownership with a low down payment as saving for a 20 per cent 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 per cent down payment and high ratio mortgages are loans with less than 20 per cent down payment.

bankAs per the Bank Act, mortgage insurance is required 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, mortgage insurance enables borrowers to purchase a home with a minimum down payment of five per cent.

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.

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 per cent and 6.0 per cent. Premiums vary depending on the amortization period of the mortgage, the loan to value ratio, the size of the down payment and the product.

In May 2014, CMHC increased the mortgage default premium for all high-ratio mortgages regardless of the loan to value. However, this new increase will be the second increase for buyers that are putting less than 10 per cent down payment which is more than 56 per cent of CMHC insured borrowers. History has shown that once CMHC increased their premium, Genworth and Canada Guaranty follow suit.

The new rate for a loan to value up to 95 per cent will increase to 3.60 per cent from the current 3.15 per cent. This will mean an approximate increase of $450 of mortgage default insurance for every $100,000 of a mortgage. In addition, a non-traditional down payment (where you borrow the down payment with a loan, unsecured line of credit or a cash back program), the premium will increase to 3.85 per cent from 3.35 per cent. This increase will not impact any homeowners that are currently insured. This increase will have an impact for anyone that is buying a property.

What does this mean in dollar and cents?CMHC increase in premium

What does this mean to me?

  • If you are putting less than 10% down payment and your lender has submitted your application to the insurer before June 1st you will be paying the current premium rate. It doesn’t matter if your completion date (when your mortgage closes) is after June 1st.
  • If you have been pre-approved or pre-qualified and you don’t have an accepted offer and approved by the insurer you will have to pay the new premium.

If you are pre-approved, pre-qualified or are looking at purchasing a property, talk to a Mortgage Expert so they can explore your options based on your individual needs.