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I have been inundated lately with home purchases involving recent layoffs in the high tech field. Since the waiting period for new housing is up to one year, recent layoff notices have negatively affected several of my clients. The scenarios are almost identical. Between the time these clients saw the new home sales person, put in their offer and got pre-approved for a mortgage at their bank, layoffs in the high tech industry have impacted their mortgage approvals. Even if they had qualified for a mortgage a year ago, lending institutions always review files before funding occurs. These clients may have had employment a year ago, but now are unemployed, or have secured employment with lesser income , and/or probation periods. Because most of these new home sales involve a large deposit (up to $20,000), walking away from the purchase can be an expensive proposition. In most cases, legal opinion states that the Vendor may keep the deposit, as well as sue for deficiency if the resale of that same property resulted in a loss of profit for the Vendor. The overall picture is not pretty, so the need to close the deal(purchase the property) is paramount. Whether temporarily unemployed or on a probationary employment, neither one of these choices are acceptable for qualification purposes for normal financing. The need to have a roof over one's head is imperative, so the playing field must expand to accommodate those caught in a temporary situation. I will address solutions in two sub-sections: a) with 25% down and (b) with less than 25% down. Those of you caught in the above situation but fortunately have 25% to put down, lending institutions are available to finance your purchase, whether or not you have a job, and whether or not your credit is clean. These lenders are termed "equity lenders". The rate of interest will depend on your overall credit ratings and debt serve criterium, but range between "posted rate" and "posted rate" + 2%. At the time of this article, the posted rate for a three year term was 7.3%. Those of you who share the same problem only have less than 25% for a down payment have
a much bigger problem. The difference between you and the category above has to do
with the equity in the property after you buy it. With 25% down, only the lending
institution need to feel comfort with your application. With less than 25% down, the
lending institution and a default insurance company share the potential burden.
There are but two of these insurance companies in Canada, Canada Mortgage &
Housing Corporation (CMHC) and General Electric Capital (GEC). If you are recently
employed or temporarily unemployed, the insuring companies will refuse to underwrite your
application, therefore normal lending institution will have no choice (by law) to turn
down your application, even if a pre-approval had been issued. There are lending
institutions who can get around the need to have a loan insured against default, thus
avoiding CMHC or GEC, but the interest rates start at posted + 2% and go up from there.
The higher the loan-to-value ratio, the higher the rate. Most of these lenders want
your business for a minimum of three years and will lock in your mortgage (closed for the
term). An excellent credit history is very important to these kinds of lenders.
You may also opt to go with the equity lender to 75% financing and arrange for a
second mortgage for the balance. In other words, if you had originally required 90%
financing, your new financing would entail a first mortgage to 75% financing and a second
mortgage for the remaining 15% of the purchase price. These second mortgage lenders
realize that if something goes wrong with your plans of securing employment in the near
future that problems may arise in their chances of recovering their money. As a result,
the interest rate will range form 12% to 18% or more. These second mortgage lenders
may also require co-signers. |