Hi, everybody. Rowan Smith from the Mortgage Center. I want to talk today about self-employed people and what the banks want to see from you in terms of the income documentation.
Like everybody else, they want to see notices of assessment to prove that you’re filing your income-tax, as in you have no arrears, and they want to see how much your filing on there.
But what about somebody who’s been a plumber for 25 years and finally decides to go out on their own. They go out on their own and they’re making way more money, but they’ve only been doing it for a year and a half.
Here’s the thing, that’s a tricky situation for a bank. The bank wants to see that you’ve got a two-year track record of income. But if you were employed back then and now you’re self-employed, how do they make the connection?
Now, not all banks, but several of them have a much more open idea here. What they’ll do is they’ll look at your historical earnings as a plumber, or whatever your job was. As long as you transitioned into self-employment in the same industry doing the same thing they’ll use an average of income over those years, including your start-up years, but also including your years as a salaried employee.
This is particularly important for a guy who’s been self-employed for only one year but has been doing something for 25 years. Often times they move to self-employment not because they were foolish but because they saw there was a lot more money to be made if they were the boss rather than just collecting a salary.
So, if you know somebody in this circumstance, someone who’s been told, “You haven’t been in business long enough,” but they’ve been doing the same job for a very long time, have them contact me. It’s Rowan Smith from the Mortgage Center.
Hi, everybody. I want to address a very common myth, and that’s that people think their variable rate mortgage, because it is open to fluctuations, is in fact an open mortgage. That’s not the case. There’s a lot of confusion as to what is an open mortgage versus a variable mortgage versus a closed mortgage or a fixed mortgage.
So, a fixed mortgage, well, obviously, your rate is fixed. You don’t have to worry about fluctuations in prime rate. For whatever the length of your term, whether it’s one or five years, your rate is fixed. Now, all fixed rates that we get here are closed. Meaning, to break that term — if you sell the home or you try to refinance during the term — you’re going to owe.
Typically, the penalty is the interest rate differential, the greater of the interest rate differential or three months of interest. Now, if rates have fallen substantially, you can expect the penalty to be quite large because it will be the interest rate differential.
If you do a search, some of the other blogs that I’ve done on penalties, you’ll see that there’s — I’ve explained the method of interest rate differential penalty calculation at a little more length. But in any case, if you have fixed — closed in almost every single case.
If it’s not a fixed or closed, then you’re going to be looking at a variable rate. Now, there is two types of variables — variable open and variable closed. The only difference between the two, other than rate, is that variable open can be paid off at any time with no pre-payment penalty whatsoever. The variable closed typically has a three-month interest penalty.
So you say, “Well, why would anybody take variable closed when they can take a variable open?” The difference is rate. Variable opens typically right now run you anywhere from prime plus 0.8 to prime plus 1.0. Prime rate is 3%, so that means your rate would be 3.8% to 4%.
Compare that to a variable closed mortgage will be at prime minus 0.75 or prime minus 0.8. So you’re looking at almost a point and a half to two-point spread between the two. So you can be paying 2.25% or you can be paying 3.75%. Clearly, the variable closed is a better deal if you’re going to hold the property for any length of time.
So people often come to me and say, “Well, I intend to sell it maybe in the next year or something.” Well, even in those cases, oftentimes the savings over a year-long period of time of getting the lower variable closed rate is better than paying no penalty, but paying a much higher rate as you go along.
So the important distinction here is that your open mortgage, you want to figure out how long are you going to hold that property? Open and avoiding a penalty may sound nice in principle, but if you actually end up spending thousands of dollars more over the life of the mortgage, why bother avoiding the penalty just to pay more monthly? For the Mortgage Center, I’m Rowan Smith.
It’s Rowan Smith from the Mortgage Centre. I want to address a very common myth that I hear about, that clients will come to me and say, “Well, I’m a first-time home-buyer, so don’t I get a better rate on my mortgage?”
The answer is absolutely not. Everybody is going to get the same rate based on their credit score and their income and whatnot. Where you get the benefits as a first-time home-buyer is being A, being able to take money out of your RRSP, tax-free, up to $25,000 per person on your first purchase of your home.
And you’re allowed to avoid the Property Transfer Tax, up to a purchase price of 425. Anything over 425 but up to 450, there’s a sliding scale. If you’re buying something over $450,000, it doesn’t matter if you’re a first-time home-buyer or not, you’re going to pay the full Transfer Tax.
The government, I guess, looks at it and says if you can afford a home that that’s expensive, that you shouldn’t be getting the tax break to being with.
So again, just as a recap, RRSPs can be used tax-free for your down payment, and Property Transfer Tax. Those are the only benefits, the only things you get to avoid as part of being a first-time home-buyer. There is no special incentive on rate, I’m sorry. For the Mortgage Centre, I’m Rowan Smith.
Hi everybody. It’s Rowan Smith at the Mortgage Centre. What I wanted to address today is one of the more common confused elements with down payment. Down payment is something that’s very important with your mortgage, but proving not only that you have the money but where the money came from is also very important.
Let me provide you an example. When you go to put, say, 20 percent down on a $500,000 place, that’s $100,000. The bank is going to ask you for either 90 days of bank statements showing that money in your account, or if it’s coming from family — that they’re giving it to you — then, they can get a gift letter.
Where people get confused is they always say, “Well, maybe I’m not really going to get the money from my savings. I might be getting $20,000 from a friend and $25,000 from my brother. And oh, I’ll pay them back later, but for now they’re going to give it to me.”
That’s not really the way that it’s allowed to work. Banks want to know that the down payment does not create any outside interests in the property. When you get money from a friend or get money from a relative, if they’re loaning it to you, frankly you should have a payment on that. Even though most times you don’t, the bank will look at it as though you would.
And secondly, does that other person have an interest in your property? So while it may seem very clear that they’re not on the title, and thus, they don’t, one can argue if they’ve given you the down payment, the fact of the matter is banks don’t want to get involved in that discussion. They don’t want to be pulled into something with multiple parties and competing interests in their security, which is the home.
So you can be expected to have to provide 90 days of bank statements showing the down payment being in your name. Now if it’s not in your name, we have to have a very good story of why. It can be money that’s accumulated within those 90 days. Perhaps you’ve had a large deal close in whatever your business is and you get a large check. That’s all very legitimate.
Then, you should be able to provide invoices or contracts or something to substantiate that the money is, in fact, yours and is not being borrowed or gotten from other sources of debt — like family that are slipping you some money in the time being until you sell the property in a few years. If you have any questions with down payment because perhaps you’re getting a hard time at your bank, give me a call. It’s Rowan Smith from the Mortgage Centre.
Hi everybody, it’s Rowan Smith with the Mortgage Centre. I want to talk today about down payment confirmation. I get a lot of questions about this. People concerned with why we’re asking for so much detail, why we’re asking for so much paperwork, so I’m going to address that today.
Most commonly, with 95 percent of the lenders out there, when we request down payment confirmation, we’re going to need a 90-day history. Now sometimes that’s not always possible. Perhaps the person’s down payment is coming from the proceeds of their existing residence.
Well, in those cases, I don’t need 90 days bank statements, I typically need the offer to purchase with the subjects removed, showing that the person has a firm offer on their property.
We also need a mortgage statement or something to confirm what their existing balance, if anything is on that. So that will establish the purchase price and the mortgage amount, and that difference is residual equity.
Now some lenders will want it a step further, and they’d like to see an Order to Pay. And an Order to Pay is a document you receive at the time of closing. This only comes into effect if the sale of the property occurs prior to the purchase of the new property.
And I don’t mean one day, I’m talking, if maybe somebody sells in June and they don’t buy until September. There’s been a period of time in there where the bank is going to want to see that those funds in there are in fact the person’s.
Now, you may say, “Why does the bank want 90 days? Why such a long history?” What they’re trying to do is establish that the funds are non-borrowed. They want to know that the dollars that a person have are not being borrowed by friends or family or some other distant relative. More importantly, that they’re not some sort of proceeds of crime from something illegal.
Typically, although 90 days doesn’t certainly get around that fact, if we can have 90 days of history of funds, chances are the money isn’t borrowed. So they’ll want to see bank statements, or savings accounts statements or RSP statements or what have you or something to prove it.
There are lenders that will accept less time for down payment, for when they’re doing a mortgage, some as low as 30 days. But it’s impossible for most clients to know which lender will do 30, which will want 90.
So if you’re looking for a lender and you can only provide maybe 60 days confirmation, because perhaps you got a large bonus, or perhaps you sold a vehicle, or something else that could be quite difficult to document without a complete hassle or paper chase, give me a call. From the Mortgage Centre, I’m Rowan Smith.
Hi, everyone. It’s Rowan Smith from the Mortgage Centre. I’m going to rehash some old material because I keep running into problems with it recently.
It regards the down payment. When you’re buying a home, people often think, “Well, I’ve got the down payment, so now I just have to qualify for the mortgage”. But the source of that down payment is oftentimes as important as the source of your income.
Now let me give you a couple examples of things that are acceptable. If a bank sees that you’ve recently sold a property, when you sell it you’re going to be given, from your lawyer or notary that represents you, a statement of adjustments and an order to pay.
This is a document that breaks down where all the funds went: some went to pay out your bank, some went to pay out legal costs, etc., and then the balance will be payable to you.
So let’s say you had $100,000 left over. Now you went and bought another place, and you wanted to put $100,000 down. Well, that’s perfect. It’s a very clear track record that the dollars were yours in your name. They weren’t borrowed, and they weren’t from any proceeds of crime. That’s really what the banks are going to be looking at.
Now another thing that would be acceptable would be bank statements showing the accumulation of funds over time, showing at least 90 days, and 90 days is the industry average. You’re going to be asked for this anywhere you go.
Now if you’re dealing with your own bank, they may not ask you for it, but it’s because they can actually see it on your account themselves. Rest assured, they will be looking for a 90-day history of your down payment to see where it comes from.
There are a couple of institutions out there that make exceptions depending on specific programs, but by and large, 90 days’ bank statements.
Now if you’ve got more money stored in ING and some other money at TD Canada Trust, some at CIBC, and you decide you’re going to shift it all into one account and then you go and do your mortgage application, you’ve made a lot of work for yourself because you’re going to have to get 90 days’ bank statements for all three of those accounts and for whichever account you put it into showing the funds going there.
The banks need 90 days, and they’re going to chase you to see all that flow of funds to account for your down payment.
Now you may be thinking to yourself, “Well, listen. The bank’s got the money. The down payment’s there. What do they care?” They care because the source of your down payment could create contingent liabilities that aren’t really registered on the title.
What I mean is let’s say that a husband and wife, newly married, get some money from the dad of the girl that got married, and then a year from now, everything spins out of control and they end up getting divorced.
Well, technical that money should be split down the middle and go separately. But it really was a gift from the father to the daughter, so perhaps even the husband and wife are OK with that. But it doesn’t clear up the fact that there’s this murkiness as to where those funds came from.
Another issue is if you borrow the down payment. People will come to me and say, “Well, I don’t have any savings, but I’ve got a $20,000 Visa.”
I’m like, “OK, well, you need $10,000 of down payment because you’re buying a $200, 000 home. So you need five percent.”
They say, “OK, I could take $10,000 off of there.”
I say, “Well, wait. This could present a problem. The reason it could be presenting a problem is because now you have to qualify for the mortgage and the credit card debt.”
Credit card debt they look at, and they assume you have to pay three percent of the balance. So on $10,000, that’s $300 a month that they’re looking at. Well, that reduces what you qualify for on the mortgage side by about $70,000 at today’s rates.
So is it cheaper for you to just pay a slightly higher rate and get a cash-back mortgage, or is it cheaper for you to pay the lowest possible rate and borrow some money maybe at 18 percent off your credit card?
Sure, everybody has the best of intentions and they think they can pay that portion back. But oftentimes that isn’t the case, and they end up holding that credit card debt and just rotating it and paying it and paying it on the long-term basis, which isn’t a great plan.
That’s not what the banks want to see. They don’t want to see no accumulation of the savings. They want to see savings behavior.
Again, you’re going to be asked for 90 days’ bank statements. You’re going to be asked to prove that it is your money, that it is not borrowed, and if it is borrowed, we have to factor that payment in.
If it is borrowed from some other source, we’re going to have to factor some sort of a payment in and prove that you’re going to be repaying these dollars.
So don’t think that you can just get a loan from your friend and a loan from your brother and that you’ll repay it back in the years down the road when you sell the property. That won’t really fly.
Now I can work with you to try to find the best way to do this, though. There are exceptions to some of these rules that I’ve explained.
But by and large, you have to leave that up to the professionals who work the with banks, because we know each individual bank, and we know which ones are stickier on this than others, and some that can make exceptions, and some that look at it a little more common sense.
If you’re in that situation, if you’re having trouble with a down payment, call me. It’s Rowan Smith from the Mortgage Centre.
Deals fall apart from time to time due to down payment not being “sourced and seasoned.” This means the borrower couldn’t prove where the money came from, and provide a reliable track record of the funds. Down payment is important to the banks! It is a vital part of the deal, and cannot be borrowed from friends and credit cards unless you qualify. How do you know if you qualify? You need to retain the services of an Accredited Mortgage Professional, and I can help you.
This video blog explains what forms down payment can take, and how it will be treated by the banks.
Transcript of Video Blog:
Hi, everybody. Rowan Smith with The Mortgage Centre. I’m going to talk today about down payment.
I was in the gym, and I was running on the treadmill, beside a couple of people who were talking about buying a home, recently. The one was lamenting to the other that the whole deal had fallen apart, simply because of their down payment. I immediately, of course, had to listen in on this conversation and eavesdrop.
The gist of it was that they were borrowing some of money from a friend, and a little bit of money from their parents. They were going to pay it all back and they had the money to pay it all back, but it wasn’t clearly documentable to them. So whoever was handling the financing just got squeamish about it and decided that they didn’t want to do it.
Now, this brings me to the point of “How important is down payment?” Well, it’s vital. It’s the capital you’re putting into the deal, the security. It’s your skin in the deal, if you will. It’s what’s going to hurt, or not going to hurt, if you walk away or get foreclosed on. Naturally, the source of that down payment is very important.
If you’re trying to borrow that money from somewhere, you can do so — so long as you can service the debt that you’re taking on as the mortgage, and the debt that you’re taking on to bring the down payment in.
A lot of people will use five percent down. They’ll borrow it from a line of credit or a credit card. They’ll say to me, “Well, here you go. Here’s the down payment.” I say, “Where did you get it from?” They go, “Well, I took it from my line of credit.” I go, “Well, uh-oh. OK, well, you didn’t. You barely qualified for the purchase, but now you don’t qualify because you’ve got another payment you have to build into it.”
The client is going, “Well, I can afford it.” Now, you might be able to afford it, but you’re not qualified for it. The bank has very specific guidelines on this fact. You’re allowed to borrow the down payment, but you have to be able to qualify for it.
You do pay a slightly higher CMHC premium as well, if you’re borrowing the down payment — whether it’s from parents or wherever else. A better move is to have your family gift you those dollars.
If your family’s trying to help you to buy a home, have them write up a gift letter. We can provide it to you. It just simply says that this is not a repayable loan. As long as that’s the truth, there’s nothing wrong with getting money gifted to you.
But gifts have to really come from people that you reasonably get a gift from. I don’t get a gift from one of my buddies. I get a gift from mom, or dad, or sister, or grandparents. We direct really a blood relation, with one step away from you — your mother, father, sister, or your grandparents, in that case. So a gift of down payment is fine.
Alternatively, you could be looking at your own savings. Now, we often have to prove where those savings have been. If you’ve been transferring money all over different accounts, it can get very confusing, so don’t do that.
What you want to do is, if you’ve got your statements, leave them in the account that they’re going to sit in. The banks are typically going to want anywhere from 30 to 90 days — usually 90 — of history of those down payment funds. Where were they? You may say to them, “Well, why does it matter where they were?” Why does the bank even care?
Well, the bank has an obligation to make sure that the funds are not coming from some illegal source, or proceeds of crime, that you didn’t get the money from a drug sale or human trafficking. I know it sounds extreme, but this is what they actually have to look for.
They have to make sure that these dollars are legitimate funds that are in a bank account that have cleared all of the fin track regulations, which involve the money laundering, and proceeds of crime, and all of that.
When we ride you about, “Hey, we need bank statements,” and, “Hey, we need proof of where you’re down payment is coming from,” first, you should expect it, and B; We, as brokers, don’t care where your down payment is coming from. We just want to get you the best mortgage we can, at the best rates, and we want to get you in there as easily as possible. We’re not here to make your life difficult.
The banks, unfortunately, have an obligation. We just have to pass that obligation on to you. If you have any questions about down payment — what’s acceptable, what’s not — give me a call.
My phone number is 604-657-6775, and I’m Rowan Smith for The Mortgage Centre.