Mortgages.ca

blog, Mortgage Education

What Is Your Home Worth?

Everything You Need To Know About Home Appraisals

what-is-your-home-worth

By Scott Nazareth
Mortgages.ca

 

Getting an appraisal is a key part of the process of getting a mortgage. It’s one you should understand when you make an offer on a home, as the appraisal process can move quickly after you make a winning bid.

What is an appraisal?

Appraisals assess the current market value of a property.

Mortgage lenders sometimes require a formal appraisal to determine a home’s value for mortgage purposes — regardless of the price that has been paid for the property. They want to be sure a house is actually worth what they’re lending its purchaser.

This part of the buying process happens after your offer to purchase has been accepted, and before the mortgage has been finalized.

 

Who conducts an appraisal?

A licensed appraiser will determine the value of the home.

In Canada, there are two bodies that license and educate appraisers. They are the Canadian National Association of Real Estate Appraisers and the Appraisal Institute of Canada. Members of both associations are recognized by banks, credit unions, mortgage lenders, and mortgage insurers.

Lenders require that appraisals are done by companies on an approved list. A licensed mortgage broker ideally has knowledge of specific appraisers on the lender’s approved list and will be sure to choose one that is local, which ensures they’re up-to-date on neighbourhood factors that may affect a home’s value.

 

Who pays for an appraisal?

Usually, the purchaser pays the $300-$500 cost of an appraisal.

 

What is included in an appraisal?

1. Value

An appraiser will study the exterior and interior of your property, as well as the land surrounding it. They will also consider the value of secondary structures located on the land.

There are three main ways to calculate the value of a property: the direct comparison approach, the cost approach, and the income approach.

 

The direct comparison approach looks at comparable properties that have been sold in the recent past. Making adjustments by looking at the details of each property, the appraiser assigns a value that the property would reasonably earn on the open market.

The cost approach is a less common way of determining value for residential homes. It’s used when relevant comparable sales data does not exist. This method takes into account the value of the land, plus how much it would cost now to construct a similar home.

The income approach is used for multi-unit properties, where the income related to the property is a key determinant of its value.

 

It doesn’t matter which method your appraiser uses. What matters is the final number, because that affects how much a lender will agree to give you.

 

2. Rental income

When you purchase a rental property, you’ll have to declare what rent you’re going to charge. That can be substantiated by providing a rental agreement with someone who already lives there, or someone who will live there when you move in.

If there’s no rental agreement in place at the time of your purchase, an appraisal will calculate the rental potential by looking at similar properties in the immediate vicinity.

 

3. Photos

An appraisal will include photos of both the exterior and interior of a home, including the attic, piping, and insulation. However, it’s important to note that an appraisal is not the same as a home inspection. They may report on similar things, but an appraisal should never replace an inspection.

appraisals-do-not-replace-home-inspections

When is an appraisal required?

An appraisal is typically not needed when borrowers put less than 20 per cent down because the lender can take comfort from the fact that the loan is covered by insurance. But in some cases — when the value or the condition of a property is in question — the insurer can request an appraisal.

Most borrowers who put more than 20 per cent down are not covered by mortgage insurance, so an appraisal is required. When the property is not insured, there is no guaranteed value in it and the lender needs some other form of assurance that the loan will be repaid. An appraisal is part of that.

But there are two ways to avoid an appraisal.

One way is to use the automated valuation model. There must be enough relevant data for this model, which looks at a database of comparable sales and determine if your property’s price is within an acceptable range.

The other way is when the loan is a small percentage of the total purchase price. If you’ve put 50 per cent down, your lender may waive the right of appraisal.

 

What happens if something goes wrong with an appraisal?

Certain factors in a property’s construction can reduce the appraiser’s calculation of its value. For example, vermiculite insulation, Kitec plumbing, UFFI insulation, and knob-and-tube wiring can all bring your appraised value down.  This can make the property un-financeable for some lenders or may require it to be dealt with prior to closing or with purchase-plus or a hold back.

If an appraisal value is less than the purchase price, the purchaser must make up the difference.

For example, if you paid $749,000 for a home but an appraiser values it at $729,000, the bank will approve a loan based on the lower number. So you’ll have to come up with an extra $20,000 to make up the difference. If you can’t, you may no longer qualify to purchase the property.

Such a situation can be challenging on the short timeline of a home purchase, so it’s a good idea to have a contingency plan. It’s possible that you’ll learn that your home has a problem in the appraisal stage, and it’s never fun to be surprised at that point.

If you’re currently having challenges with an appraisal, contact us to find out how we can help.

Is it worth it to get a second opinion?

Yes. If you’re in doubt, it’s worth the peace of mind that comes with knowing your property was fairly and accurately assessed.

That’s especially true if your first appraisal comes in lower than expected. After a second opinion, the bank may choose one or the other of the reports, or they may take an average of the two. Either way, it’s worth knowing that your property was fairly assessed.

Does an appraisal affect my taxes?

No. It’s not the same as a tax assessment, and your home’s appraisal is not shared with tax assessors.

 

Do you have questions about appraisals or the mortgage process? Book a call to discuss how we can help with your mortgage needs.

blog, Mortgage Education

Don’t Sign That Renewal Letter!

When your mortgage term is nearly up, your lender will offer an easy renewal, but don’t be fooled into signing it

do-not-sign-that-renewal-letter

By James Harrison
Mortgages.ca

 

If your mortgage is up for renewal anytime soon, you can expect to receive a letter from your lender giving you the option to simply sign it and send it back for an easy renewal of your mortgage.

It may look innocuous. But it’s not. Whatever you do, don’t sign it.

The rate your lender is offering in that letter is probably half a per cent — or more — higher than the going rate. Depending on the size of your mortgage, that could cost you tens of thousands of dollars in additional interests charges, not to mention paying off thousands less in principal.

 

Consider your options with a broker

Don’t just sign the renewal letter and send it back. Instead, spend time making an informed decision about the biggest investment of your life.

The first step in your decision-making process is to reach out to a reputable broker. At Mortgages.ca, we help our clients consider their options by asking a few basic questions:

  • Who is your current lender?
  • How much is outstanding on your mortgage?
  • When is the renewal maturity date?
  • What are your financial goals in the next one to five years?

 

During a 10 to 20 minute call, with a bit of questioning, my clients eventually bring up something they hadn’t considered as a significant factor in their mortgage planning. They’re surprised to learn I can help them achieve their financial goals by managing their mortgage.

Most people don’t spend time thinking about the big picture and don’t have a knowledgeable sounding board for the discussion. I consider that a very important part of my role as a licensed broker. I ask questions to learn about their problems, then come up with solutions that will help them meet — and sometimes exceed — their financial goals.

 

Doing the work is worth it

Sometimes people think changing lenders is time-consuming, so they don’t question the renewal letter. They simply accept the bank’s terms without question. But exploring other options is well worth it. Would you trade 45 minutes for a few thousand dollars?

Whatever your informed choice turns out to be with your renewal, the process doesn’t have to be complicated. We can communicate by phone and email. In-person meetings aren’t needed — though they’re always possible.

 

Make an informed decision

When your mortgage term is over, you have three options:

  • negotiate with your lender for a better rate than the renewal letter offers
  • transfer your mortgage to a new lender to get a better rate and/or different terms
  • refinance to get equity out, or to reduce payments by changing the amortization period

 

Timing is important

I advise my clients to make sure their new mortgage is set up approximately three to six months prior to the renewal date.

It’s important to reach out as soon as you get a renewal letter. If you leave your research and decision-making to the last minute, your lender may automatically renew you into an undesirable mortgage — and possibly at a very high rate.

 

Is your mortgage coming up for renewal soon? Contact us about how I can help you make the right choice.

 

 

blog, Mortgage Education

Non-Resident Buyers: What You Need to Know About Buying Property in Canada

The rules for borrowing to buy property in Canada are a bit different for non-residents

Toronto Waterfront

Toronto is among the top places for non-residents to purchase property in Canada. Photo credit: Scott Webb via Unsplash

 

Who can buy real estate in Canada?

Canada welcomes buyers from anywhere in the world, and there are no restrictions to the types of properties people can buy.


What is a non-resident?

It has nothing to do with citizenship.
Lenders define a non-resident as someone who does not earn an income here and who does not file taxes in Canada.


How much does a non-resident need for a down payment?

Lenders typically ask for a larger down payments from non-residents of Canada than they do from resident borrowers. Exactly how much more depends on a few factors. For example:

U.S. Residents

If you’re living in the United States,  plan to use the property rather than rent it, and can provide proof of income and down payment, your down payment must be at least 20 per cent of the total purchase price.

Elsewhere in the world

If you’re living anywhere other than Canada or U.S. and can provide proof of income and down payment, your down payment must be at least 35 per cent of the purchase price. As well, your down payment cannot be a gift from another person or entity.

 

(Note that If you already own property in Canada, you won’t qualify for this special program and will have to provide proof of income and a down payment of at least 35 per cent.)

The Bond

Many non-residents buy condos in Canada’s urban centres. Above, The Bond Condos in Queen West, Toronto. (Photo credit: Condos.ca)

What documents do non-residents need to qualify for a mortgage in Canada?

  • Proof of income (letter of employment, pay stubs and income tax returns)
  • Proof of down payment (bank statements for the last 90 days)
  • Reference letter from a bank outside Canada
  • Report from an international credit bureau or bank statements for the last six months

 

Will lenders consider rental income as part of a non-resident’s income?

Lenders will not allow applicants to include rental income as part of their income to qualify.


What kind of mortgage rates and terms do non-residents get?

For the most part, provided they meet the mortgage eligibility criteria, non-residents can access the same mortgage products that are available to residents of Canada.

But there are a few restrictions:

  • Some lenders may charge a rate premium for non-residents
  • Non-residents cannot have amortization terms of more than 25 years
  • Non-residents cannot get home equity lines of credit
  • Non-residents cannot refinance


Do non-residents need to be in Canada at any point to secure financing for a home?

Usually, non-residents will need to be in Canada at least twice to complete the process of financing and buying property.

First, a buyer will need to visit Canada to open a Canadian bank account. (Note, there are exceptions to this rule. For example, some of our clients have found that, as HSBC Premier clients, they’ve been able to open accounts in Canada from their home countries.)

Second, non-residents must be present at closing, as there are no power of attorney options for closing.

What taxes do non-residents pay when purchasing real estate in Canada?

Non-residents are subject to the same land transfer taxes as Canadian residents when they purchase property here. Those buying residential property in or near Toronto will be required to pay Ontario’s Non-Resident Speculation Tax, which is 15 per cent of the purchase price. Click here for a closer look at Ontario regions subject to the Non-Resident Speculation Tax.

Want to learn more?

Buying a home from another country can seem like an overwhelming prospect because there’s so much to learn. But we’re happy to explain the details. As licensed mortgage brokers, we work with home buyers and a wide array of major lenders to match people with the perfect mortgage for their needs. Our services are free to the home buyer.

 

Ready to dig deeper?
Go to our online application form so we can assess your specific mortgage needs.

blog, Mortgage Education

Top 5 Reasons to Work With a Mortgage Broker

Purchasing or refinancing your home can feel pretty daunting – but it doesn’t have to be when you have the right resources.

Steve Harrison, mortgage broker with Mortgages.ca breaks down the top 5 reasons why working with a mortgage broker can save your time AND your wallet!