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  • Lenders: Making a list checking it twice....

    Author: Michael Campagna Date: March 1, 2016

    In the old market pre 2008, lenders were looking for ways to say ‘yes’, because the rate of return was worth the risk. Today, lenders are looking for ways to say ‘no’. As such, approvals and declines are not based on the client per se but on the Broker.

    Many brokers are working in a 2008 mentality during a 2013 reality. Lending is not necessarily based on the ‘yes’ or ‘no’ model it used to be, but is based largely on probability. In the old market you could stuff a deal in the box and it was approved, in the new market, if you stuff a deal in the box it is simply considered.

    Therein lays the problem. Many brokers in general think that because the deal is in the ‘box’, it is going to be approved. But when the deal comes back declined, the broker is flabbergasted. Therefore, the idea of importance isn’t about what the lender is looking for, the real question to be addressed is: what the broker is looking for?

    Essentially, when a individual is purchasing a property lenders look at four variables when considering a file for approval: credit, income, property, and down payment/equity. They don’t just look at one variable or another, they look at all four. So you could have great credit and solid income, but if the property isn’t ideal in the lender’s eyes, the deal could be declined.

    Credit:

    A credit score can range anywhere from 300 poor up to 900. If a mortgage is greater than 80% of the value of the property 20% down payment or less, the minimum credit score a lender is able to accept is 600. This is because a lender must first seek default insurance for the mortgage by a 3rd party insurer CMHC, Genworth, and Canada Guaranty. The credit standard is set by the insurer and not the lender. If the mortgage is less than 80% of the value of the property, a lender can accept a credit score as low or as high as they see fit. This is because a lender does not have to obtain default insurance for the mortgage and therefore the score standard is set by the lenders internal policy.


    The credit score is only half fraction even of the battle. When lenders assess ones credit the factors to be addressed are as follows:

    • Late payments

    • Outstanding balances

    • Current monthly payments on debts

    • Time frame of credit

    • Number of accounts on the credit report

    So from a lending stand point, credit would be optimal if there are minimal late payments showing, low balances on loans being rated by the report, and a credit profile that has a long standing history with 3-6 accounts being reviewed.

    Of course, this is general because each credit file is reviewed on a case by case basis. But, in essence it serves a beacon that one should consider about his or her credit rating.

    Income:

    Lenders view income in two ways: qualified or stated. Qualified income is referring to income that is able to be proven via proper documentation tax returns/ T4’s etc. A borrower under this camp will be someone who is paid hourly or salary. Or, a Self-Employed person whom can prove their income with the amount stated on their personal Tax Returns. Essentially, the amount of income being proven will be the deciding factor as to how much one is able to be approved for. A lender will take gross income and compare it to all liabilities and produce the magical number.
    Stated income is more for commissioned sales people or business owners. Under this income type, lenders are not looking to verify income per se because, as we know, many self-employed individuals have quite a few ‘write-offs’, and their Tax Returns don’t portray their income accurately. What lenders are looking for is 2 years confirmation of Self-employment/commissioned sales, strong credit, and no personal taxes outstanding.

    Down payment:

    The minimum down payment for a income qualified deal first time buyer or not is five percent of the purchase price, and 10% for a stated income deal. Of course, this is assuming the applicant applying for mortgage financing will fit all other program guidelines set by the lender. The main element for this down payment amount is that the property be owner-occupied. If the purchase is for an investment property, the minimum down payment a lender will consider is 20% of the purchase price. With many new rules coming to light in the public, there is ambiguity surrounding the amount of money one will require to purchase a home.

    Yes, generally speaking the larger the down payment the more flexibility, but the days of, "big down payment and done deal,” are over.

    Ideally lenders appreciate a down payment that is from a person’s own resources:

    • Accumulated savings

    • Sale of an asset car, house, investment

    • Inheritance

    • Lottery etc.

    Lenders may consider a down payment that is gifted or borrowed or from other resources other than the borrowers own but this depends on the overall file.


    Property type:

    When lenders are reviewing the risk of a property they will consider the location, dwelling type, and condition of the property in question. The overall guiding theme is marketability, because if the file ends up in foreclosure a lender will want to sell the property ASAP.

    If a property is niche, the deal may be perfect in all other respects but be declined solely due to property. Properties that are more difficult to fund are hobby farms, mobile homes on pad rentals, rural locations, acreages greater than 10 acres, and properties that have a revenue stream such as horse boarding or some other type of income generating activity. This is because if the file does end in foreclosure the saleability of the property is not strong.

    What lenders are looking for is standard residential dwellings that are characteristic of its surrounding area. For example, an apartment in Vancouver city versus a heritage home in Vancouver city. The heritage home is very specialized and will only appeal to a nominal fraction of the purchaser market at best; whereas the apartment is standard and will appeal to a large segment of purchasers in that area.


    To conclude, the four factors as stated above, desire a high amount of preliminary analyzing with a mortgage broker especially in this current mortgage market, before determining which lender/ lenders a file should be submitted to. There are multiple lender’s and programs out there, so the way a file should be presented when submitted could vary quite a bit from lender to lender.
    Probability of approval increases dramatically when a Mortgage Broker is highly tactful with their submission.

    Thus, in today’s market is it always best to be thinking in terms of probability and not certainty. If the deal is viewed in terms of certainty the final product is usually sloppy work, which in turn translated into a deal being declined when in reality it could have been approved.

     

     

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Author : Michael Campagna
Michael Campagna has been in the mortgage business for about 6 years. Throughout these years Michael has been associated with thousands of mortgage transactions. Through this experience Michael has developed a natural intuition that has allowed him to understand a person’s wants and needs. His approach is a little different compared to others. Michael does not assume. He lives by the code: collect, organize, execute. Through this process Michael breaks down the mortgage process outlining the mechanics behind a mortgage and the elements that come along with a mortgage. This analysis allows the client to gain an understand of the numerical value and logical value behind mortgage finance. This allows Michael’s clients to be fully aware of exactly what is been offered and eliminates the red tape that comes along with uncertainty. Thus, comes Mortgage Made Simple.. Micheal’s dedication to the over all mortgage process is able to be defined is the mandate as this is his creation.