As I talked about in my previous post, understanding deposit structures and mortgage approvals is essential to purchasing a new condo from a developer in Toronto.
However, what do you do when you can get the funds for the deposits, but you run into trouble when it comes to securing mortgage preapprovals? This can occur for a number of reasons including:
- Income too low. The number one factor in getting mortgage approvals is your income. Lenders need to see you have enough coming in on a regular basis to ‘pay the bills.’
- Over leveraged. Many investors have several properties and/or contracts in their portfolio at any given time and this can stretch you thin, making the ratios that banks often use for pre approvals look out of wack.
- Self Employed or not enough employment history. Perhaps you are a new grad fresh out of school and your income is low now, but will increase substantially over the next 1-3 years. Or if you are self-employed, lenders often apply even more stringent qualifications before approving you.
So what are your options for getting pre approved? How can you overcome this hurdle and get the condo that you have been dreaming about or that is such a great investment opportunity? Here are a few ways to get around the roadblock
- Use a mortgage broker. Usually developers will have a specific lender they work with and ask purchasers to get preapproved through. And 9 times out of 10 that lender is one of the Big-5 Canadian banks. Their lending standards are often more rigorous than those used by mortgage brokers - who have access to dozens of lenders. Getting a pre-approval from a mortgage broker, if the developer allows it, can be a way around this dilemma for purchasers.
- Get a co-signer. For a number of reasons, you may not qualify for the mortgage at the time you want to purchase the suite, but perhaps you know that by the time the condo is ready for occupancy a few years down the road, your situation will likely have changed and you will qualify. In the time being, and just to get the qualification, why not get a co-signer to get you over the hump? You can always remove or change the other names on title before final closing. Time to put in the dreaded phone call to mom and dad…or your rich uncle who always liked you best!
- Negotiate. Depending on the particular developer, the stage of the marketing life cycle of the project, and the relationship that your real estate agent has with the developer, you may be able to simply remove the condition for mortgage pre-approval from the agreement, or make alternative arrangements that satisfy both parties.
- Letter of Commitment. If you are over-leveraged due to other properties or contracts in your portfolio, sometimes you can’t get a mortgage approval, but if you have a long-standing good relationship with your bank you might be able to get your branch manager or a mortgage manager to write you up a letter of commitment. A letter of commitment is similar to a mortgage approval, but it is less formal and is based more on the ‘good will’ of your relationship with the bank and their intimate knowledge of your personal finances. Sometimes this will satisfy the developer if they see that you are in very good standing with a well established lender even though you don’t technically qualify for the mortgage using traditional ratios etc.
So there you have it. Some suggestions for obtaining mortgage approval when difficulties arise when buying a new construction condo in Toronto.
If you have any questions about mortgage financing for new condos in Toronto, feel free to contact me any time.
Not a very sexy post title I know, but just because you are buying a pre-construction condo in Toronto doesn’t mean that you can avoid the world of traditional mortgages.
Normally when you buy a pre-construction condo you have to put down a series of deposits to secure your suite with the developer. How much you pay and when you pay varies. Factors affecting the deposit structure include:
- The developer’s bank - what they require. Developers need to get mortgages too! The banks require them usually to get a 15% down payment as a minimum from purchasers.
- When you buy - when you purchase in the condo’s marketing life cycle. The earlier you buy, the less flexibility there generally is in the deposit structure. When a project has reached their benchmark amount of units sold to get their financing approvals and permits to begin construction, sometimes they ease up on the deposit structure and this is often a good time for purchasers to jump in again.
- The developer’s preferences and promotions. Some developers require more as a rule of thumb, some require less. Some offer promotions with flexible payment schemes, others do not.
- Who you are. Yes, developers have been known to practice deposit structure discrimination - that is, changing the deposit structure requirements based on who the purchaser is. Usually though this ‘discrimination’ is simply tied to whether or not the purchaser is a Canadian resident (often non-residents must pay significantly higher deposit amounts).
So deposit structure on new condos varies, but usually you can find something like 15% to be paid out in 3 or 4 installments over the course of 6-9 months after initially signing the agreement of purchase and sale. Then an additional 5-10% also is usually required at occupancy (not to be confused with condo registration date).
So you have manged to scrape together the money you need for your deposits and you are ready to go ahead with your purchase. Are you finished? By no means. The developer will gladly take your 15-25%, but they also require mortgage approval for the remaining amount. Here’s an example: say you buy a 1 bedroom and den condo for $300,000. You must pay out 20% in deposits over the next 3 years. 20% of $300,000 is $60,000. That leaves $240,000 in unaccounted for funds for which you need to get a mortgage pre-approval.
Sometimes buyers have the funds for the deposits, but for various reasons, getting a mortgage approval can be tricky. If you fit into this category, tune in the blog tomorrow for some tips on how to get around this dilemma.
If you have any questions about deposit structures and mortage approvals, feel free to drop me an email any time.
Published at November 30, 2007
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It has only been a week since the news came out the BMO would be offering a program designed to eliminate the sting of Toronto’s new land transfer tax, and now TD has announced a similar program for home buyers in Toronto. If you are planning on buying a house in the next few months and you are facing the new land transfer tax, you may qualify for TD’s program to have your tax paid for.
Contact me today if you would like more information on this great offering from TD Canada Trust.
Published at November 20, 2007
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In response to the public outcry regarding Miller’s new taxes, BMO is offering a promotion in which they will pay the city’s new land transfer tax for buyers. Of course certain restrictions apply including you must switch your primary bank account to BMO if it is not there already. However, if their interest rates are competitive with other banks, this could save buyers around $4000 on the average property in Toronto.
This is a smart move and I’m sure other banks will follow with copycat type promotions as the reality of the land transfer tax looms nearer.
For more information about this promotion please contact me.
