Winnipeg's Real Estate Blog

Mortgage Pre-Approval and C.M.H.C.: What Buyers need to know!

Being pre-approved by a mortgage lender is, today, the absolute minimum requirement before looking at, or making offers on, homes or condos.  In this day of 'multiple offers', homeowners can not take your offer seriously unless they know that you are pre-approved by a lender.  But there is a bit more to this story:

In Canada, Banks are permitted to loan out (mortgage) up to 75% of the value of the home.  For a $160,000 home, they can loan out up to $120,000 to the buyer.  The rest, in this case $40,000, has to come by way of a down-payment, or be insured by a Mortgage Insurance Company.  In Canada we have Canada Mortgage & Housing Corporation (CMHC)  and GE Mortgage Insurance Canada.

Here is how it works:  Mr. & Mrs. Smith want to purchase that $160,000 home, but only have 5% down payment ($8,000).  This means that they will require the above "Mortgage Insurance", and CMHC or GE will be happy to do so, provided that the Smith's qualify (i.e. have a clean financial history, with no defaults or bad credit).  Of course, either company will charge for this service, and this amount, usually several percent of the value of the mortgage, will be added onto the monthly payments.

Here is where it gets interesting:  Banks (or Credit Unions for that matter) may 'pre-approve' the buyers, but they can not speak for CMHC or GE.  The final word is up to these insurers.   So we could have a situation where the Smith's are pre-approved, and their offer is accepted, however once the entire deal is shipped to CMHC (or GE) for approval, it could still fall apart.

If that happens, the Smiths could loose their deposit, if they were not careful in how their offer was worded.  For example, if they wrote an 'unconditional offer', and CMHC denies their application, they will not get a mortgage, will not get the house, and thus loose the deposit.

Must Read:  Deposits: Why do we need it and is it safe?

“Where will the Winnipeg market go, and when will it end?

Trying to predict the market is like trying to predict the weather: there are simply too many factors involved to do it accurately.  Some of my colleagues thought it might have ended in 2006, but that was not the case.

This market is fuelled by several factors:  First time home buyers looking for their home and 'empty-nesters' looking to downsize.  Since both of these groups of people are looking for the same type of home, these smaller, entry-level homes, especially in the range of $150,000 to $200,000 are the big factor in this boom. We’ve now seen 1000-ft side-by-sides, without a garage, in the south end of the city, selling for around $170,000. Townhouse condos in one project jumped over 20%.

Another factor appears to be ex-patriots returning from other provinces, such as Alberta and Ontario.  Having sold their modest homes for HUGE dollars, these folks are returning to find that YES, $300,000 still buys a very nice home in Winnipeg.

So, if you are a home-owner, enjoy.

If you are home-buyer, waiting for this market to end may not be the best strategy. Annual price increases of 15 to 20% far outpace wage-hikes, so waiting to save a bit more money for that first home could mean falling further behind. 

Some buyers have expressed concern (or hope) that the bubble will burst, much like it has done in the U.S The U.S. market-drop came when several different problems combined to create a 'perfect storm' of sorts.

First, home-builders in the U.S. follow a different business plan than their Canadian counterparts:  For one thing, in the U.S. they build homes 'on spec', meaning that they just build them and hold them in inventory.  Builders may have a hundred or more homes, just sitting and waiting to be purchased, whereas in Canada, for the most part, the home is pretty much pre-sold. When a small drop in activity led to an overstock of homes, builders got scared and dropped prices and offered incentives so that first-time homebuyers could afford to buy these homes.

This led to storm #2:  Under-qualified buyers overextended their credit and purchased homes which were normally out of their price range.  When the short (6 month) mortgage re-opened at a higher rate, they suddenly could not afford to keep the house, and it went on the market, competing with other, new homes. This caused a drop in prices, in an effort to chase after buyers who were quickly starting to loose interest in what they saw was a burst in the market bubble.

This may be a bit of an over-simplification, however I hope it goes a little way to explaining what happened.  Aside from the difference in home-builder philosophies, our Canadian banks also have higher standards than their U.S. counterparts, further protecting the industry and home-buyers alike. While no one can predict where this will go, I also know some of my buyers who purchased a nice home 2 years ago for around $50,000 less than they would have paid today.

Deposits: Why do we need it, and is it safe?

One question home buyers often ask is :  Why do we need to put up a deposit?

In some areas, (the U.S., for example) the deposit is referred to as "Earnest-Money".  It shows that the buyer is serious, and actually locks him/her into the deal.  Here is an example:

Mr. & Mrs. Brown put their house on the market in May, and receive an offer for $190,000 with a $500.00 deposit.  Possession date is 3 month down the road.  They (foolishly) accept this offer, and go on with their lives, perhaps buying a larger home.  3 weeks before possession date, they receive notice that the buyers have changed their minds:  perhaps they lost one of their incomes, or were transferred in their jobs, or found a better home.  No matter what the reason, the buyers want out.

The buyers would immediately lose their deposit of $500.00, and 'may' be sued by the Browns for more than that.  With the courts, who can tell what the final outcome will be, however more time and money will likely be lost in their effort to win this suit.

Now we can see why home-owners are well advised to take larger deposits.  I recently had a listing in the $140,000 range and received several offers on it.  One in particular came with a $50,000 deposit cheque......these people understood the meaning of "earnest money"......

Is the deposit safe?  Absolutely.  The cheque is made out to the Listing Company and goes into trust, where it is held until it is turned over to the homeowner on possession date.  If the offer is not accepted, the cheque is not cashed at all.  If the deal falls apart on conditions, (Ex: the buyer can't get financing, or the home inspection fails) then the deposit is returned to the buyer. 

More IS Better!  In this day of competing offers, homeowners are often impressed by larger deposits.  Naturally, the rest of the offer has to be acceptable as well, but if two offers for similar amounts are presented, the one with a $10,000 deposit may well be accepted over the one with $2,000 'earnest money'.

Costs involved in buying a house or condo!

I have found that many buyers are not aware of the fact that there are additional costs when buying a home or condo.  I had always 'assumed' (I know...you're not supposed to do that),  that banks would council their clients as to the actual costs involved, but learned that this is not always so.  Blame the hectic market pace, understaffing or any number of things, but for whatever reason, it's not being done.

So when buyers come to me, I sometimes have to give the bad news:  Here are some of the major expenses involved when buying a home (or condo)

Legal Expenses:  The basic legal fees for purchasing a home run around $500.00  Now, many lawyers will quote something like $299 or $349,  but thats the basic fee.......there will be additional expenses on top of that, so you can expect to budget around $500.00  (This will be significantly higher when purchasing a "Private Sale", where the lawyer has to draw up the offer and act on your behalf)

House Taxes:  Depending on the time of year you take possession, you may have to pay the remaining taxes for that year.  In Winnipeg, our taxes run from Jan to Dec, and are paid in June.  What this means, in short, is that if you take possession after June, you will most likely have to pay a portion of the taxes, (assuming the current owner has paid up the taxes for the entire year).  If you take possession before June, you may actually get a refund from the current owner.  The joy this brings will be short-lived, however, as you will then be responsible for the full tax bill on June 30th.....

Land Titles Transfer Tax:  This one is a real beauty.  Every re-sale of a house or condo is subject to this tax.  The kicker is that the more expensive the home, the higher the tax. 

So a $90,000 home (if you can FIND one  of those) will cost you $360.00. 

A $150,000 home or condo will cost you $960.00.

A $200,000 home will cost you $1710.00

For every $1000 above this price, you can add another $20.00 for our provincial coffers  (you know, to keep our roads nicely repaired and stuff like that)

So if you're up at a $300,000 house, you'll be facing a $3710.00 bill....

Of course, the buyer needs to be aware of moving costs, and other incident expenses.

The Good News?   Many buyers are also not aware that they wont be making a mortgage payment for about a month AFTER they take possession.  So if you're moving from an apartment into a house, and you take possession on July 1st, and left your apartment on June 30th,  your last apartment rent payment was likely made on June 1st, while your first mortgage payment will probably not  be made until the first week in August.