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.
"It's not that there's anything new in terms of obtaining financing," says David O'Gorman, President of MortgageLand Inc. "What's 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 applicant's 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 O'Gorman. "There's 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."
O'Gorman, along with several other market experts, says it could be 18 months before the start of a turnaround in the economy so 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.
- Be sure to be pre-approved for a mortgage, not just pre-qualified.
- Ensure you have adequate financial resources to cover closing costs.
- Maintain your strong financial position. Don't 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 and closing date as short as possible. You do not want difficulties if the appraisal comes in lower than the purchase price.
- Have you done 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?
- If a buyer is looking for a quick closing, have you thought about where you 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?
From: Ontario Real Estate Association (OREA) Realtor Edge News, December 2008