While the majority of Canadian financial gurus continue to maintain that Canada will not experience the same economic meltdown as the United States, the global credit crisis is most certainly having an impact here. Just ask anyone looking to find mortgage financing. It seems the days of easy credit are over as financial institutions tighten up on lending policies.
Its not that theres anything new in terms of obtaining financing, says David OGorman, President of MortgageLand Inc. Whats happening is that financial institutions are following policy more closely and enforcing requirements already in place, more stringently. For example, self-employed mortgage shoppers will be asked for three annual Notices of Assessment from the Canada Revenue Agency instead of two, plus financial statements. Pay stubs and a letter of employment will be required from salaried employees to prove their income. Banks will also be looking at lower loan-to-value ratios meaning larger down payments. They will also be stricter about verifying an applicants down payment.
Even private lenders who are typically prepared to take on greater risk will likely be looking for more equity in the properties they finance. Rules and requirements for programs such as CMHC insured mortgages may also be tightened in future.
Real estate appraisals can be another concern for buyers and sellers in a softening market according to OGorman. Theres potential that a property could be appraised down the line at a lower value than the price offered. REALTORS® should look at shortening closings to 30-60 days to avoid this problem.
Todays real estate market means REALTORS® will need to be more diligent about financing details when taking a listing or working with a buyer. When taking a listing, it will be important to ensure there is enough equity in the home to close the transaction. He recommends REALTORS® do their best to get verification on the amount of equity available and to check for secured lines of credit against the property. It will also be important to ensure buyers get pre-approved for financing not simply pre-qualified. Buyers should ask for an approval certificate from their lender before shopping for a home. REALTORS® also need to take the time to sit down with their buyers and read over the pre-approval conditions to make sure they can realistically meet the income and down payment requirements, as well as any other conditions of funding.
OGorman, along with several other market experts, says it could be 18 months before the start of a turnaround in the economy so REALTORS®, sellers and buyers should brace themselves. The Canadian government will have to find ways to keep the real estate and new construction markets alive in these tough economic times. What we really need to see are more affordable homes for first-time buyers.
Credit crunch checklist
Here are a few tips and points to consider regarding financing, that may help closings go smoothly in a tougher credit market.
When working with our buyers:
- Have you pre-approved for mortgages, not just pre-qualified.
- Verify the source of the down payment. Ensure you have adequate financial resources to cover closing costs.
- Suggest that you do not to take on any additional debt or change jobs until after closing.
- Review the mortgage commitment for any conditions that may be problematic to fulfill, before waiving financing conditions.
- Keep the time between purchase & closing date as short as possible. You do not want difficulties if the appraisal comes in lower than the purchase price.
When working with our sellers:
- Qualify your selling financial plan. Prepare a Net Equity Statement.
- Will the property sell at a price that will pay off all mortgages, pre-payment penalties, lines of credit, cash-back clawbacks, legal costs and real estate commissions? If not, what is the source of the funds to cover the short fall? We help you under stand.
- If a buyer is looking for a quick closing, have you thought about where they plan to move?
- Are you willing and/or in a financial position to take back a portion of the sale price as a first or second mortgage?