The Death of the Pre-Approval?

Rather proud. (Photo credit: This Year's Love)

It's pretty standard in the real estate industry for Realtors to require their clients to get a mortgage pre-approval before spending any time showing them properties.  It saves both parties time but what many buyers don't realize is the pre-approval you get now is not the same as it used to be.

During the boom years when the banks were swimming in money it wasn't a problem to cover the costs of pre-approvals but things have changed.  There are two significant costs involved for a financial institution to offer pre-approvals.  The first is the cost of underwriting; the underwriting staff can spend more time looking at pre-approvals that never fund than they do on live deals.  In most businesses staffing is the largest cost of business so more than doubling their workload can be expensive.  As a result, most pre-approvals are no longer underwritten.  They are generated by a computer which checks the basic facts such as beacon score and debt ratios to ensure the application fits within a lending program.

The second cost is hedging the rate hold.  All lenders hedge their rate holds because they have no idea where the rates will be when and if the deal funds so they short the bond market so that if rates go up they can still afford to offer the lower rate.  They have to perform this process for pre-approvals and live deals alike.  With a live deal they know exactly how much and when they need to invest for but with pre-approvals it's and expensive guessing game which may not even fund (60% don't) and mortgage professionals tend to enter the maximum mortgage that a particular client can afford which is likely more than they'll end up spending.  The result of this cost is a markup in rate of 0.20% by most lenders and the cancellation of pre-approval programs at others.

So what used to be a reasonable estimate of whether or not a client would be approved for financing has now become just a bad rate hold.  That being said, it's still a good idea to get pre-qaulified by a mortgage agent to avoid potential problems.  The job of underwriting has fallen to the broker.

If the current trend continues (and there's no indication it won't) I foresee a time in the near future when most lenders won't offer pre-approvals and the one's that do won't be any more than a rate hold that will only protect homebuyer's from drastic rate hikes.

Related articles

• Simple Definitions: Pre-Qualfication and Pre-Approval
• Pre-Approval Do's & Don'ts

Buying Your First Investment Property

Property market (Photo credit: Alan Cleaver)

I bought my first rental property in 2007 and it was one of the most nerve racking things I'd ever done!  It was such a rush I did it again.  My first house cost $29,080 in Saskatchewan and had a reliable tenant in  it already.  It cash flowed nicely but the three I bought after that were a disaster and cost me a bundle.  A good education is expensive I guess.

I'd like to put the knowledge that I've gained out there for any prospective investors so hopefully you can avoid the mistakes I've made.  There are three cardinal rules to a good rental experience:  Cash flow, good tenants, and buying with selling in mind.

The first rule of investment properties is Cash Flow is King!  DO NOT accept a negative cash flow in the hopes that the property value will increase.  Always invest for cash flow.  You'll have to know the rental market quite well and don't count on getting maximum rent either.  You should be able to make money every month even with a lower rent than you expect.  If you intend to hire a professional Property Manager then make them a part of the purchasing process; don't rely on a Realtor to tell you how much rent to expect.  I won't accept a Debt Service Coverage Ratio (DSCR) of less than 1.2.  If you don't know what a DSCR is and how to calculate it then you're not done studying.

The second rule of rental properties is A Good Tenant is Worth their Weight in Gold.  Buy a property in a neighborhood or near a major employer that will attract the type of tenant you want.  I love nurses.  They make good money and are professional and that comes with a certain level of responsibility.  There's really only two things you want from a tenant:  pay rent on time and maintain the value of your asset.  Take your time to find a good one, do your credit and reference checks and trust your gut; it'll be worth the effort.

The third rule is Buy with Selling in Mind.  You need to have an exit strategy (preferably several) from the beginning.  Even if your plan is to keep it until your kids retire you still want to have back up plans.  If you buy a property that is discounted and well below the neighborhoods price ceiling then you could fix it up and refinance, or flip it, or do a rent to own to a tenant buyer who wants to put in some sweat equity in lieu of a down payment.  You have options!

If you respect these three rules you're far more likely to have a great landlording experience.  There are many other things you'll need including a good lease, a good lawyer, an exceptional mortgage broker, and enough cash to keep things moving.

Some other things to keep in mind are:  real estate is all about location, location, location.  Don't ever purchase in a bad location no matter how good a deal it seems to be.  You don't want to buy someone else's problem.

Keep mainstream; I only buy two bedroom apartments and three bedroom, two bath houses or townhouses.  I avoid condominiums as I like to have total control and hate paying condo fees.

Never buy anything you haven't seen yourself (yes, I've done that and it's a bad idea).  You get a different perspective on a property when you're standing inside it yourself.

Trust only your own judgement.  Allow others to advise you but not make decisions for you.

Keep enough cash on hand to deal with at least two major maintenance issues at once including loss of revenues during the repair time.  Smart investors don't over-leverage themselves.  They know they can handle their investment for the long term and so will never become the desperate seller.

And last but certainly not least, stick close to home.  Invest where you can get in your car and deal with a problem yourself.  It's convenient and you know the market better.  You'll also learn a lot by doing the property management yourself to start.

If you're interested in purchasing an investment property and would like coaching or a second opinion on a deal, I'm always happy to help.

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• ARLA gives top tips to first-time landlords

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• Is there ever a bad time to invest in a rental property?

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Will my Amortization change at Renewal?

Prime Minister Stephen Harper (Photo credit: University of Saskatchewan)

No.

This is a question I keep hearing since the government has reduced the maximum amortization.  The answer is no it won't.  If you renew with your current lender then nothing will change.

If you change lending institutions at renewal (called a switch) it's the same contract and all the terms must be honoured by the new lender; although a new lender will have to re-qualify you using the new debt ratios.

If you decide to refinance or take equity out of your home then you are creating a new contract which would then be subject to the new rules.

It's also important to remember that these rules only apply to high ratio mortgages which had less than 20% down payment or equity at origination.  The lenders get to choose their own policies for conventional mortgages.

Questions about renewing or switching - call me.  I'm never too busy to talk real estate!

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• Long Amortizations SurviveWith 20% Down

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• New mortgage rules could make switching or refinancing tougher

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