Mortgages !!! How much do we know about them ? I remember when I was a young man in the military I called about a farm for sale near my home town. I asked the realtor who answered the phone what the asking price was. He responded $20,000. I had about $10,000 in savings. I told him I only had about $10,000. He informed me the owner wouldn't accept that and hung up. That was a 150 acre farm with a nice house and barn. Today I realize how misfortunate I was that that particular realtor answered the phone. A different realtor would've advised me that with 50% down and a stable career in the military I would have no problem getting a mortgage for the remaining 50% and that the payments would only be about $60.00 per month. Imagine what that farm would be worth today and imagine what that realtor cost me and his customer who obviously wanted their property sold. I didn't realize I could get a mortgage and I didn't realize I should've called another realtor or even that I could. I'm telling you this story to emphasize the power of knowledge and what the lack of knowledge can cost you. Knowledge and expertise come from a life time of learning.
Here is another example. A friend called for advice. A local company had approached him about a valuable surface mineral they had discovered on his property that they wanted to purchase from him by the ton. (so much per ton).I advised him that was outside my area of expertise and he should consult with a mining engineer or geologist who would know the current market value. He said he would do that. Some months later I asked him how he had made out and if he had checked with a professional. He said no and that the company had made him an offer and he had countered back double the price they offered and they had agreed to pay his price and he had signed a contract to that effect. I advised him that I had heard that the company had also made a deal with a large timber company on the adjacent property and he should check with them to see what they were getting. Several days later he called me back very upset. The timber company was getting 5 times the amount he was getting. I advised him to consult a lawyer. This time he took my advice. After a 10 year legal battle he did receive a settlement but why didn't he take my advice the first time ? I'll tell you why ! He thought he knew. I have to tell you this fact. Most of my customers think they know more than me and in many areas they do but not when it comes to real estate and mortgages,( in most cases they don't) but human nature makes it very hard to trust someone else's opinion especially someone who is looking to make a dollar off you. Penny wise and dollar foolish. Probably but understandable because most of us are this way, myself included.
We all in most cases would rather make our own mistakes than feel taken advantage of by some professional we don't know or trust. That is why some one listing their house will always list with a friend over an experienced realtor because trust is more important than experience in the minds and hearts of consumers even though in the long run it may cost them dearly.
In this report my goal is to give you information. How you use it will be up to you. My goal is to gain your trust so you will not hesitate to contact us should you need any of our services. Now on to my report.
Mortgages A Brief History
In 1975 when I got into the real estate business banks didn't do mortgages per say. Mortgages were mostly done by the trust companies. Banks would give you a loan secured by real estate usually no more than 50% of the value. Back then many people would borrow enough to put in a basement. Finish the basement ,live in the basement while repaying the loan and then borrow again to finish the house. Trust companies would lend a conventional mortgage of 75% of the appraised value or the purchase price which ever was least as dictated by the bank act. As you can imagine selling real estate was a little more difficult than it is today. In the governments attempt to make home ownership easier for Canadians CMHC came up with high ratio insurance which gave the lenders the option to lend up to 90% of the purchase price or the appraised value which ever was least. The lender would tack the insurance fee on top of the mortgage and send the fee off to CMHC. This was a win win for all involved . Home buyers, lenders, realtors, appraisers and lawyers. More people qualified to buy homes so more homes sold and more homes were built and more people were put to work.
Last but not least lenders couldn't lose because the loan was insured by the government. YES FOLKS THE GOVERNMENT CAN DO SOMETHING RIGHT. Although they receive little in the way of recognition CMHC is one of the best things to have happened for all Canadians economically and beneficially. Helping us all prosper.
Of course by now banks were into mortgages in a big way because our historically conservatives banks liked the no risk factor associated with high ratio insured mortgages. The competition was fierce . The 1981 recession slowed things down a bit when rates hit 22% but when the rates came back down things rolled on again until 1989 when the next recession came. In my opinion this was a much tougher recession. Consumers hated the new HST tax and just refused to spend. Many business's folded including most of the trust companies who were caught with most of the commercial mortgages which with so many companies struggling many were in default and of course not insured because high ratio insurance was not available on commercial properties. A long come our friendly banks who pick up their assets for pennies on the dollar and very few trust companies survive this recession. Even today it is very difficult to get a commercial mortgage with most of the banks and lenders willing to do only 50 to 65% of the appraised value with their main competition today being the credit unions or some government agency as a choice of last resort.
Although commercial loans are difficult ( I would love to see high ratio insurance for commercial) residential mortgages are amazingly easy to obtain with 30/40 year amortizations, no down payments and I declare products for the self employed and commissioned consumers. A vast array of products and terms. There has never been an easier or better time to get a residential mortgage. There are even products for previous bankrupts and those with past credit problems. I continue to be amazed as CMHC and the lenders continue to make home ownership more obtainable. CMHC even has some competition for their insurance products in the private sector. Note: Do not confuse mortgage insurance with life insurance. Mortgage insurance insures the mortgage for the lender. If the borrower doesn't pay the mortgage the insurer will pay the bank out. Hence the bank can't lose. Mortgage insurance fee average 3.75 %. Eg: 100,000 mortgage the lender gives you $103750.00. Your payments are based on $103,750 and on closing the $3750 (the premium) is sent to the insurer (CMHC). You pay for it and the bank /lender can't lose. So you see why lenders love high ratio mortgages and why it's so easy to get a residential mortgage today.
Most mortgages fall into two classes Prime ( strong borrower with a high beacon score) and Sub-prime ( weaker borrower with a lower beacon score) Note: Every borrower has a beacon score which is utilized to determine their credit worthiness. Credit agencies such as Equifax and Trans Union use a complicated formula based on your credit history that determines your ability to pay two years down the road to assign your personal beacon score usually ranging from a low of 400 to a high of 800. Between 600 and 800 is prime and anything less normally sub prime. It is very important to maintain a good beacon score to access credit at a reasonable interest rate. The interest rate you are charged is mostly determined by your beacon score. Right now we can get a prime borrower 5.019 %. A sub-prime borrower would pay between 9% and 12%. To give you an example the prime borrower would pay around $500 per month PI (principle and interest) on a $100,000 mortgage over 25 years. Sub-prime at 12 % that same payment would be around $1200 per month. So you can see how important your beacon score.
Here are some tips on how to maintain a good beacon score
1. Always make your minimum payment on credit cards and never be late.
2. If in business. Always pay your personal bills before business loans. (usually only personal credit is shown on your credit check most business loans are not.
3. Do not shop for credit by applying at different lenders. The system assumes you are turned down and each application lowers your score. ( a plug here for mortgage brokers we take one application and can shop over 40 lenders for you with one credit check thus maintaining your good beacon score.)
How does bankruptcy effect my beacon score ? Many of my customers have been bankrupt in the past. Bankruptcy today is common place and no longer as stigmatic as it once was. Computers have basically taken the human factor out of the credit system. It no longer makes sense to struggle for years under a mountain of debt if your circumstances change and you can't afford to meet your commitments. Bankruptcy quite often is the most reasonable solution mainly because the credit system gives you no recognition for struggling and overcoming your financial problems. Once you are behind your beacon score drops and no one will deal with you. That bad history stays on your credit for 7 years. If you go bankrupt you are usually discharged within 9 to 12 months. After that you have to re-establish a credit history usually by a secured credit card or car loan and with in 18 months with a good job you would qualify for a mortgage. Yes , record of the bankruptcy stays on your credit but once you re-establish it is not as detrimental as a previous bad repayment history. In many cases as long as there's no substantial equity in your home you can even keep making your mortgage payments and keep your home through the bankruptcy. Please understand I am not an advocate for going bankrupt. That is a very personal decision but now you know how it works and if a decision is required that decision can be based on the reality of the situation and not misinformation.
With this report I have just scratched the surface of the basics of how the mortgage industry works and the credit scoring system. Hopefully you have found it informative and insightful. I would be pleased to help you with any real estate , mortgage, appraisal or business consultation you may need.
Kindest Regards Larry Matthews