Consider getting pre-approved before January 1, 2018

There is not a lot of time left. New home buyers may want to consider getting a pre-approval before the new rules come into effect on January 1, 2018. Some lenders have already implemented the new rules, which includes a stress test,  that will affect homebuyers with down payments of 20% or more.

Armed with a pre-approval, you may be able to purchase a home before the expiry date – usually 120 days –  and won’t be affected by the new rules. Many buyers are getting ahead of the new year.

According to statistics released on December 14 by The Canadian Real Estate Association (CREA), national home sales rose strongly in November 2017.

Highlights:

•  National home sales rose 3.9% from October to November.
• The number of newly listed homes climbed 3.5% from October to November.
• The MLS^® Home Price Index (HPI) was up 9.3% year-over-year (year-over-year) in November 2017.
•  The national average sale price edged up 2.9% year-over-year in November.

Home sales via Canadian MLS^® Systems rose for the fourth month in a row in November 2017, up 3.9% from October. Led by a 16% jump in sales in the Greater Toronto Area (GTA), the surge in sales there accounted for more than two-thirds of the national increase. The continuing rebound put November sales activity a little over halfway between the peak recorded in March 2017 and the low reached in July.

 “Some home buyers with more than a twenty percent down payment may be fast-tracking their purchase decision in order to beat the tougher mortgage qualifications test coming into effect next year,” said CREA President Andrew Peck.

“National sales momentum remains positive heading toward year-end,” said Gregory Klump, CREA’s Chief Economist. “It remains to be seen whether stronger momentum now will mean weaker activity early next year once new mortgage regulations take effect beginning on New Year’s day.”

Let’s Review

The new rules apply to federally regulated financial institutions, not credit unions or private lenders. Yet.

Insured Mortgages

This is a mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage, meaning with less than 20% down.

Insurable

This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but is portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense. There are tougher rules as well – the maximum amortization is 25 years, applicants must qualify at the Benchmark rate and property must be valued at less than $1M. Property must also be owner-occupied.

Un-Insurable

These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income, and on purchases greater than $1M.

All uninsured mortgages are subject to a new qualifying rate, as of January 1, 2018, or stress test. This rate is the Bank of Canada’s five-year rate, currently at 4.99%, or the lender’s contract rate plus 2% --whichever is greater. Your mortgage payment will still be based on the contractual mortgage rate but the higher rate will be used for qualifying purposes.

Which mortgage is best for me?

That depends. Every situation is unique. There are pros and cons for each of the three types of mortgages, depending on your financial goals.  For example, sometimes the spread between the insurable and un-insurable rate is significantly large enough to justify the borrower paying high-ratio mortgage insurance to obtain the lower rate.

A mortgage professional can explain the differences and give you the best advice and get you best interest rate.

So, start with a pre-approval.  Call your TMG mortgage professional today.

Mortgage fraud becoming more common

Real Estate and mortgage fraud is a growing concern to the industry as high prices in some markets have squeezed buyers and attracted perpetrators. The victims of fraud can include homeowners who find their homes have had mortgages placed against them by unknown individuals. Other victims include buyers in neighbourhoods or in condo complexes whose homes have been artificially inflated or deflated.

Issues of fraud can range from prospective home buyers submitting fake or altered documents including letters of employment, bank statements or tax returns, to money laundering schemes, identity fraud and title fraud.

While some may consider upping the rental received on a basement suite or deciding to leave something out of their mortgage application as harmless “white lies,” that are not doing anyone any harm, the reality is that any type of fraud puts everyone at risk -- lenders, insurers, consumers, and the economy.

In a recent Mortgage Professional Canada Fraud Summit a panel of experts weighed in on the state of fraud in Canada and what’s being done to mitigate risk for all involved.

In an online survey, Equifax found that 84% of Canadians felt the country’s housing market had become too expensive for first-time home buyers. Sixteen per cent thought mortgage fraud was a “victimless” crime. And 8% admitted to making false statements on their own applications.

Why is fraud becoming more common?

The Canadian mortgage industry’s rules and guidelines have become more complex. As prices increase, coupled with short housing supply, some Canadians feel they need to get into the market fast, even if they can’t qualify in the standard way.

In a hi-tech world it’s not always the case that lenders and borrowers meet face-to-face and more and more applications are received over the Internet, fax or e-mail. Then there’s also pressure from consumers to have those deals close quickly.

Types of Fraud

There are two general categories of fraud:

• Fraud for shelter – There may be no intention to default but an individual commits fraud in order to get a mortgage on a home they could not otherwise obtain or afford.
• Fraud for profit -- There is an intent to default and/or flip the property, then walk away with the proceeds. For example, title fraud  -- a fraudster assumes the identity of a homeowner, then proceeds to use forged documents to transfer ownership of a property and will use fake identification to get the mortgage on the property, then walks away with the money. 

How do they do it?

Actually, there are many ways but banks and non-bank lenders watch for three of the most frequent methods:

Falsifying Owner Occupancy

This is quite easy to --a rental property requires a 20% down payment or more. However, if a buyer says they’re purchasing an owner-occupied home, with a 5% down payment, then turns around and rents it, there’s not a lot that can be done about that in advance of funding.

Playing with debt

If someone can’t qualify for a mortgage due to a high debt load, they may ask friends or family members to loan them the money to pay off debt, which, of course, does not show up on a credit check. But they still owe the debt.

Lender also look more critically at the following: Private purchases and sales, high ratio mortgages, equity gifts, powers of attorney, recent activity on a title and if the property is free and clear.

The costs of mortgage fraud

There are financial costs --insurer payouts for defaulted loans and police and court costs to deal with offenders. Then there are the costs to the individuals who were not aware of the fraud and who are in danger of losing their homes. There is a reputational risk for all mortgage brokers and the erosion of consumer trust.

What’s next

Detecting fraud has become a priority for the mortgage industry. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is investing in automation with a focus on fraud for commission, increasing income verification intelligence and improving Fraud Trending Reports.

Also, compliance is getting stricter and lenders and insurers are becoming more sophisticated and more hi-tech. They have the ability to model applications and behaviours, which offers a multi-view of a borrower. There is also pattern recognition software used by insurers. 

But, fraudsters don’t go away, they come up with more elaborate schemes. The industry and consumers need to stay on top of it all. So, educate yourself about fraud to better protect yourself.