5 Mar

4 Costly Mortgage Mistakes of New Home Buying “Incentives”.

Mortgage Tips

Posted by: Kiki Berg

It’s exciting! brand new shiny homes are being promoted, opulent new appliances and granite countertops followed by massive marketing with deep discounts, rebates, cashback, free tv’s, will pay your strata and mortgage payments? Developers are throwing in these incentives to entice buyers and many are getting shocked with the ramifications when they close at the lawyers.
 
Nothing comes for free. Period. There is always a catch somewhere. From a mortgage perspective, I have had countless homebuyer mortgage files land on my desk because the bank wouldn’t or couldn’t approve your mortgage after you have already plunked down that 5-10% deposit. Which by the way is NON-REFUNDABLE in most cases! TIP: ensure your contract has an assignable clause. READ here
 
Let me tell you a story about 28 year old Jim. He worked for a developer and was told it was a GREAT location to buy. He could move in and flip it in a few years with all the equity increase. He was excited!  He strolled into the sales office and a BIG banker was their selling RATE. The banker asked a few questions, looked at his paystub and said your pre-approved! Jim put down $25,000 deposit. The place would be ready to move in about 8 months.  6 months later, Jim goes to BIG BANK to get all his financing approved for his new shiny condo and “I am sorry, Jim…we can’t approve your mortgage”.  WHAT!
Jim was referred to me.  I reviewed his income. His credit was great, he had his $25,000 downpayment/deposit (5% down)  in place…the problem was his INCOME.  The banker person didn’t get enough information to ascertain that he really didn’t qualify right the beginning. Why? While he was a T4, paycheque, tax paying employee…he worked for his family and insurers and lenders require that 1) you have to have TWO years of working history when working for family 2) he ended up being off on medical for 4 months and his 2nd year of income was WAY lower than his first year…he didn’t qualify for his mortgage. He lost his $25,000 deposit as the builder could not Assign his contract.
There are MANY reasons that buying “brand new” requires a licensed mortgage planner to be watching your back. Right from the time you decide to put in the offer to the day you close at the lawyers.
Yes, many banks will OFFER to do a 1 year rate hold…but that is all it is…a rate hold. It DOES NOT mean your pre-approved or will get the approval come closing time. That’s NOT a risk you should take.
 
Here are the 4 COSTLY mortgage mistakes:
  1. The value drops in your new place. If you are only putting 5-15% downpayment, and your property closes in 6-12 months; you could be putting yourself at financial risk. Lender lends money on the value of the property, not the purchase price. If you bought at $300k and the lender has it appraised before closing at a value of $280k…you only get the mortgage loan based on this VALUE amount. If you only have 5% down and no money to make up the cost…you will be up the creek (or borrowing from bank of mom/dad or reducing your downpayment). You’re on the hook for the difference! You promised to pay Mr Developer $300k to buy it, but the bank will only give you a maximum of 95% of the $280k value, not $300k purchase price. While in the Metro-urban cities this isn’t a concern today, certain areas in Alberta and rural areas this could be a factor.

  2. Who is watching that your credit score or your spending habits? It might be good today, but in 8 months you could decide to buy a new car (hey what’s $200 a month?) Well that $200 a month might be enough monthly debt payment to ensure you don’t qualify for a mortgage.

  3. Who is making sure that if you change jobs, go from full-time to part-time that you still qualify? Part-time income is looked at ENTIRELY different than full-time. Maternity leave and disability…same story.

  4. Those “perks” you are offered? They are called “Decorating Allowances” or “incentives”. They WILL be DEDUCTED from your purchase price/ value if it’s written INTO your contract of purchase and sale. This can be confusing and potentially have financial impact if you have limited funds for downpayment or are expecting a “cashback”.

    What are they and when are they good?  “monetary cashbacks”, “cars”, “TV’s, furniture, mortgage or strata payments for a year…will be deducted from your purchase price. This is where lies the confusion and costs.

    Say you put 5% down or $15,000 on your $300k home and that’s all you have. The Developer/Realtor offers $15k incentive (such cash to go buy furniture) into the contract. The lender would remove the $15k from the purchase price meaning $300k p/price now = $285k with a max mortgage of $270,750. Remember, lenders LEND on VALUE! So the client would need to come up with a down payment of $300k- $270,750 = $29,250. So you don’t actually GET the cash as it cancels each other out.  The important clarification is any builder incentive that becomes a “credit” at closing will be deducted from the purchase price and could affect your downpayment or expectation of a monetary rebate. If the LENDER is not aware of the “incentive” or credit and finds out after the fact when lawyer sends in addendums to contract at closing then this is where you could end up with an increase in downpayment. This is where it is CRUCIAL for the mortgage to be submitted correctly and be intouch with the Developer/Realtor to prevent confusion or closing cost expectations. Many times this is more of a marketing ploy than any financial benefit to you.

    So when are “incentives or decorating allowances” good? Exceptions to this would be stove, fridge, laundry or things that are necessary to LIVE in the property. They are not incentives.

These are just a FEW of the challenges. Please feel free to get that “rate hold” from the developers banker person…just ensure you have a licensed and experienced BROKER monitoring your file monthly until closing, so you DON’T LOSE YOUR DEPOSIT or end up sitting at the lawyers office like a sitting duck, and no money to close your new dream home.
 
Happy home buying..