June 27, 2008
Proving income, Small Business
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As has been mentioned previously in this blog, I am a huge proponent of small business owners. They don’t always get covered in the press but I believe they are the drivers of our strong western economy. It is this deep respect that drives me to learn how to help these people better.
Contrary to many mortgage myths small business owners can get a mortgage for their home and/or revenue properties. For the most part they have to meet all the same criteria their employed counterparts would have to meet with a key exception - proving income. Employees of companies simply get a letter from their HR department and a recent pay stub to show what their yearly wage is. Small business owners don’t generally have pay stubs and no lender would accept a letter for the small business owner that was created and signed by the small business owner. So we find other ways to prove your income.
One of the comments I typically hear from small business owners is, “Why do they ask for so much paperwork?” The reason why is to get third party corroboration from a few sources to ensure the person is active in a business that makes money.
There are two different ways to do this depending if you are a sole proprietor or a shareholder in an incorporated company.
Sole proprietor
Sole proprietors report to the government their business revenue within their personal tax submission (T1 General) every year. So when they need a mortgage they often need to ensure that they have filed their taxes for the previous two years (including the statement of business activities) and paid all their taxes owning. A copy of the T1 Generals submitted to CCRA will be sufficient to satisfy the lenders proof of income criteria in most cases. If taxes are shown to be owed then we need a receipt that shows these have been paid.
Shareholder of an incorporated company
If a person is at least a 50% shareholder in a corporation then the lender will need to see the following:
- The last two years audited financial statements,
- The last two years Notice of Assessments – to confirm that no taxes are owed to the government. If taxes are shown to be owed then a receipt is needed that shows these have been paid.
Both sole proprietors and shareholders in an incorporated company may also need to show one of the following:
- The company’s business license,
- The company’s articles of incorporation.
The above noted documentation will be required and in some cases further documents may be needed as well. Please contact me directly to determine what specific documents you will need.
As I mentioned earlier I respect small business owners and want to make the process for them as simple as possible. This is why I educate my customers so they know what to expect.
June 12, 2008
Case Study, Switch
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A switch is what the mortgage industry calls it when a person who has a mortgage with one lender decides they are unsatisfied with their current interest rate and want a better rate. So they “switch” from one lender to another.
Generally these type of files are really simple for the borrower, the lender and the broker.
It is important the key aspects on file do not change from one lender to the next; for example:
- Amortization
- Mortgage Amount
- Borrowers
- Property
Case Study
George purchased a detached house in September of 2007 for $300,000. He used $15,000 as a down payment. He also took advantage of the 40 year amortization option. His mortgage amount at the time of purchase was $294,547.50 including the insurance premium.
At the time he got a 5-year fixed rate of 5.7% from lender A. His payments were $1,546 per month.
Nine months have passed and prime has come down.
George is wanted to know if he could switch his mortgage to a different lender and get a better interest rate.
He understood that he would pay a penalty and wanted to know how much it would be.
He called and let me know what he wanted to do so I took an application. The whole process took less than 15 minutes.
It is important to know that he did not want to change anything on his mortgage, just his interest rate.
After I had his information I asked him to send me some key data:
- Employment letter
- Recent paystub
- Most recent mortgage statement.
While I was waiting for him to send me this information, I investigated how much his penalty would be with his current lender. It came out to $4,139.80.
Then I figured out how much interest he would have paid for the duration of the term on his mortgage, and compared that to how much he would pay if he switched to a five year variable rate (assuming interest rates stay steady).
The total interest he would pay if he stayed with the fixed rate at 5.7% would be $65,108.08 for that period.
The total interest he would pay if he decided to switch to a variable rate currently at 4.15% would be $47,223.96 for the same time frame.
So even including his penalty of $4,139.80 he could save as much as $13,744 over the course of the next four years.
When I told George the news he was very pleased and ready to change. I made sure that he was aware that the prime interest rate will fluctuate and his real savings would likely be different.
I also made sure he was aware that he could choose to fix his interest rate at anytime to the best fixed rate available with the lender at that time.
He understood the situation and decided to move forward.
When I had all the paperwork and George’s “ok”, I submitted the data to the lender. The file was complete by the end of the following week.
George paid the penalty from his own funds and was surprised how easy the entire process was.
The morale of the story is - Ask me to give you the straight facts to help you determine if it is advantageous for you to switch your mortgage.
June 2, 2008
Mortgage Insurance, Uncategorized
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People don’t typically understand how the Mortgage Insurance Fee is calculated. This is too bad because it gives great insight into how lenders and insurers think, and can in- turn be helpful in other parts of the deal as well.
The fee is determined by the simple calculation noted below.
Fee = Premium rate X Mortgage Amount
We know what the mortgage amount is but how do they figure out the Premium Rate?
The premium rate is determined by two factors the Loan to Value and if you have decided to have an amortization that is greater than 25 years.
Loan to Value is calculated by the following calculation.
Property value – Down Payment = Loan to Value Ratio
Property value
So in the case of a house that is valued at $200,000 and the buyer has a $20,000 down payment then the loan to value is…
$200,000 - $20,000 = $180,000 = 0.9 = 90%
$200,000 $200,000
With a greater down payment that ratio reduces and with less of a down payment the ratio increases. The lender and insurer look at this ratio as one of the risk determinants. They believe that if the person has a greater down payment that it shows two things.
- First that they will have a greater incentive to make their payments because they have their own money tied to the property.
- Secondly that anyone that can save a large sum of money must be pretty good with their money and paying debts.
So the smaller the down payment the higher the premium and the larger the down payment the smaller the premium.
Extended amortizations are another factor that can affect the insurance premium. It used to be that the maximum amortization that was available was 25 years - so all insurance premiums were based upon the 25 year standard. Recently lenders have given the option of extended amortizations up to 40 years. By spreading the debt over an extra 15 years it reduces the monthly payments but it also increases the risk to the lender/insurer because the principle won’t be paid down as quickly. So they add to the premium for every five years that the amortization is extended beyond 25 years.
The system takes these two factors and comes up with the Premium Rate.
Please contact me.