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Buyer's market But there is a hook

I read this article in the Globe & Mail & thought it was good information explaining how the banks tighter lending strategies are playing out with real time purchasers

REAL ESTATE

It's buyer beware of the paperwork

rcarrick@globeandmail.com

It's a buyer's market in housing right now, but with complications.

Blame the global financial crisis. It chewed up your investments in the stock market, and now it's an irritant if you're a home buyer who wants to capitalize on falling sales and prices in some cities.

High mortgage rates are a major problem, but there's more. Mortgage brokers say lenders are getting tougher about the documentation they want to see from borrowers, and they warn that appraisals can cause difficulties for buyers as well.

"We're seeing a different attitude," said John Cocomile, president of mortgage brokerage GreedyMortgage.com. "Everyone is questioning value; everyone is much more cautious."

You'll see this in the documentation required by your lender when qualifying you for a mortgage. Jas Grewal, a mortgage planner with The Mortgage Centre, said self-employed mortgage applicants are now being asked for three annual notices of assessment from the Canada Revenue Agency to document their annual income, up from two in the past.

Salaried applicants are being asked for recent pay stubs plus a letter of employment, whereas just the pay stub may have sufficed in the past. Much more onerous are the requirements being made of people with investment properties, Mr. Grewal said. In the past, it might have been enough to supply a lender with a spreadsheet showing the cash flow for a borrower's properties.

"Now, they want to have the lease, the actual mortgage statement, the property tax bill, all of that stuff," Mr. Grewal said.

Added paperwork is a hassle for home buyers. More alarming is the growing potential for houses to be appraised at prices that are below the price agreed upon by a buyer and seller.

An appraisal of a home's value is a standard requirement before a lender signs off on a mortgage. Borrowers with a down payment of 20 per cent or more handle their own appraisals, or their lender arranges things. For high-ratio mortgages, where the down payment is smaller and the mortgage must be insured against default, the appraisal (if required) is handled by the Canada Mortgage and Housing Corp. or whoever else is doing the insuring.

In a strong real estate market, appraisals are almost always a formality for buyers. In a weakening market like we have today, appraisals can be more of a sticking point.

Mr. Cocomile said appraisers are concerned about valuing homes today at prices that could seem wildly out of sync in a year's time. "Appraisers are coming in with values that are extremely conservative," he said. "They're worried about property values."

The risk for buyers is that the home they've agreed to buy at a certain price will be appraised at a lower value that in turn reduces the amount of money they can borrow. Consider a hypothetical example where a house is conditionally sold for $400,000 and then appraised at $360,000.

If you planned to borrow 80 per cent of the price of your purchase, you'd expect to get a loan of $320,000 from your lender. But with the appraisal in hand, your lender would only be willing to advance you $288,000, or 80 per cent of $360,000.

"The lender always wants to lend against the lesser of purchase price or appraised value," said Layth Matthews, president of RateMiser Mortgage Advisors in Nanaimo, B.C.

Mr. Matthews explained that appraisals are based on the selling price of comparable homes in the same area. If a home sells at a low price, maybe because it has been on the market a while and the seller needs to expedite a deal, then that can nudge prices lower. The same goes if there's a foreclosure in the area.

"If you have any kind of softness in a market, that's going to hurt," Mr. Matthews said.

In the height of the real estate boom, buyers in hot markets sometimes had to submit purchase offers without financing conditions. Today, as the market advantage tilts away from sellers to buyers, it's essential to include this condition in an offer. That way, you have the choice of walking away from a deal or trying to come up with extra funds to cover the gap between what your lender will provide and what you need to close the deal.

Resale housing prices in major cities across the country fell 6.2 per cent last month, and it's easy to see more declines ahead. Mortgage rates have been on an upswing recently and consumer confidence has fallen to lows not seen since the recessionary days of 1982. The message for people who want to buy a home: Affordability is on the rise, but so is the aggravation factor in trying to get a deal done.

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Mortgages then and now

Here's a comparison of the mortgage environment one year ago and today:

  Year ago Today
Rates Variable-rate mortgages Prime - 0.6 of a percentage point Prime + 1 percentage point
DocumentationSalaried individuals A paystub and maybe a confirmation of employment Paystub and confirmation of employment
Self-employed Two annual CRA notices of assessment Three annual CRA notices of assessment
Appraisals Standard when you buy a home Routine Potential for appraised home values to be lower than agreed upon sale price

THE GLOBE AND MAIL