February 12, 2010
Book, First Time Home Buyer
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You know the old line, “There are only 3 things in this world that you can count on: birth, death and taxes”.
If you are purchasing your first home then it is likely the first time you will pay City Taxes. These taxes are separate from the income tax that you probably paid in the past. These taxes are levied by the city that you live in and are used to pay for things like roads, parks, street cleaning and hockey rinks. These taxes are very important to all people who live in the city because if these taxes are not collected from everyone then the city services would grind to a halt.
These taxes an annual assessment based of the value of the property. Once the value of the property has been established (they do this through a complex mathematical system) then the nominal tax rate is applied. This gives you an annual payment that is your part of the total city tax revenue.
These taxes are so important to cities that the province has created a law that if the home owner does not pay these taxes then before they can change possession to another owner – the taxes owing are collected from that revenue – even before the lender. This rule alone makes taxes a very important part of the mortgage process to the lender.
The lender wants to have all homes in its portfolio taxes paid so that if a house goes through the foreclosure process that they will get the full sum owed to them as first payable on the Title.
The lender will ensure that taxes are paid by one of two ways:
- They pay them on your behalf. The Lender takes 1/12 of the annual tax amount and sets that as the payment. This payment is added to your monthly mortgage payment.
- You pay them yourself monthly via the Tax Installment Payment Plan (TIPP) Program. Payments will be automatically taken from your bank account on the 1st of the month.
February 11, 2010
Book, First Time Home Buyer
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One thing that really helped me through the purchase of my first home was to be organized.
It is very common to meet people with a great idea, “I want to buy a home.” But they seem to be basing all their purchase on thoughts in their head. So it is very common for me to hear people ask their better halves, “How much was that fireplace again?” or “Where did you put the <insert key piece of paperwork here>?”
My suggestion is to create two file folders – one for the purchase and one for the mortgage. Carry these files with you or put them in a place that you can easily access them.
Keep important paperwork in the corresponding folder. Be sure not to throw away any key data until the deal has been finalized and you have moved in. This will likely be quite a lot of paper but it is better to have the information in case you need it in a pinch.
By having two places to keep your documents and referring to them all along as you go through the process you will be basing your decisions on real facts not what you think you remember.
February 3, 2010
Book, Case Study, Employed Persons, First Time Home Buyer, Interest Rates
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Closed mortgages offer great rates and typically fit most people’s needs. Most people feel that they can stick to the term of the mortgage they have chosen. But like a wise man once said – life is what happens while you were making other plans.
Things happen – divorce, your job is moved to another city – your needs change. This is ok. Lenders will allow people to get out of mortgages that they have gotten themselves into – for a fee of course.
These fees are called Pay Out Penalties.
Pay out penalties are typically determined in two different ways:
- Interest Rate Differential
- Three Months Interest
Lenders take whichever of the two is greater.
The Alberta Mortgage Broker Association defines the how these are calculated as follows:
“You can calculate these two penalty amounts using the simple interest formula to five a borrower an approximation of the cost:
I = P x R x T”
I = Interest
P= Principal
R = Rate
T = Time
For the three month interest calculation the formula would look as follows:
I = Current Mortgage Balance x Original Mortgage Interest Rate x 3/12 (Since time is in years we only want to calculate 3 months)
So if you have a mortgage of $150k at a rate of 7.5% the calculation to determine 3 months interest would give us a value of $2812.50.
For the Interest Rate Differential calculation the formula would look as follows:
I = Current Mortgage Balance x (Original Mortgage Interest Rate – Current Mortgage Interest Rate) x Time remaining in contract
So if you have the same scenario as above and the current mortgage Interest Rate is 6% and you have 3 years left in the term the calculation to determine the Interest Rate Differential would give us a value of $6750.
In this case the lender would charge you $6750 for leaving this mortgage.
What I believe is important to note in this case are:
- The lender is not picking a number out of the air – there is a clear formula that they use.
- People need to know what the consequences are. This allows people to make educated decisions and educated decisions are good decisions.
If you have any questions regarding this please do not hesitate to contact me or another qualified Mortgage Broker.
February 3, 2010
Book, Employed Persons, First Time Home Buyer, Pre Approval
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When people think about a getting their mortgage they usually think it is all about them. If they can qualify to make the payments why would a bank ever say no to any property?
The reality is that the borrowers are only one part of the equation – the property is the other part.
Lenders want to make sure that if unforeseen circumstances arise and they are forced to start foreclosure proceedings that they can sell the property for market value. This means that the house/condo has to be in at least “average” condition.
Lenders may shy away from properties that are great deals because of the following:
- Refurbished grow op house
- One of those houses where there were 20 cats living there
- “Fixer-upers”
- Dirt basements
The lender also wants to make sure that the property has enough funds in the Condominium reserve funds to handle any unforeseen expenditures for the building. So if a building is 35 years old and only has $2500 in its reserve fund this will likely raise a red flag.
It is important to understand that the lender did not implement these policies to stop people from buying places. They just want to be sure that they have invested their money someplace safe – they already think you are strong now they need to confirm that the property is strong as well.
This is just one of the many reasons to be sure that you use a qualified Realtor, home inspector and mortgage broker in your purchase.
November 24, 2009
Book, Employed Persons, First Time Home Buyer, Mortgage Insurance, Pre Approval
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Whenever the lender decides to lend money on a particular property they take into account two separate yet equally important parts.
Firstly, they look at the quality of a borrower- their credit worthiness and their ability to make the mortgage payments. The evaluation of the borrower typically takes place in the pre-approval process.
Secondly they look into the quality of the property. What they want to ensure is that in the event of a borrower not being able to make their payments and in turn goes into foreclosure that they can easily market the property and get their investment back. So you can understand that if the house is not at least of average quality then the typical purchaser is not going to want to buy it. The lender evaluates value of this in one of two different ways. If the file is insured then the insurer does their own internal evaluation. If the file is not insured than the lender may request that a third-party appraisal is completed.
One important thing to note is that the quality of the property may take into account things that are beyond the scope of the physical property itself. For example, in a condominium complex, even though the condo complex may be in great condition sometimes the condo financials are not in order.This would be something that the lender would consider to be a serious issue and therefore may not lend of this property.
Why I am telling you this is not to warn you not to go to try different properties but rather to let you know what type of resistance you might find if you decide to purchase a house that is considered a fixer upper.
This is a critical area that needs to be addressed before financing conditions can be met. This is why it is so important that you send all data about the property to your mortgage broker as soon as you can after the Offer to Purchase has been accepted by the seller.
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