Finance and Mortgages

1. Finance and Mortgages Barbara Grodaes Details

2. Role of Mortgage in Real Estate • Types of mortgages • Key mortgage lenders • Mortgage terminology • Legislation that affects mortgages • Mortgage qualification process • Mortgages and Real Estate Contracts Details

3. Mortgage • Vehicle used to finance a purchase • Existence is evidence of debt (registered at Land Titles Office) • Transfer of an interest in land created by a contract • Security for a loan that lender makes to borrower (mortgagee to mortgagor) Details

4. Covenants • A covenant is a promise made under seal and is binding on the part of the promisor apart from the other elements of the contract • Borrower’s covenant to pay the principal is the borrower’s Personal Covenant • Gives lender right to sue borrower personally to obtain repayment of the balance outstanding Details

5. Borrower’s Main Covenants • Repay the principal of the loan • Pay interest on the unpaid balance • Pay the taxes levied upon property • Insure the security against loss by fire • Maintain the property in good repair Details

6. Consideration • Mortgage document is signed under seal (enforceable contract) • Borrower is bound to each covenant • Each covenant is meant to stand alone • Mortgage document is not signed by the mortgagee Details

7. Types of Mortgages • Builder’s Loan (advance funds at construction stages) • Conventional (not more than 75% of the lending value) • High-ratio (above 75% to 95% of the lending value) • Collateral (security to a promissory note – not assumable) • Equitable (secured on the basis of the equity in the property) • Blanket (covers 2 or more specific properties) • Switch (mortgage transferred to another lender) • Fully open, closed, limited prepayment, portable, pre-approved, vendor take-back Details

8. Lending Value of Property • Lending Value is the selling price or appraised value, whichever is less • Loan-to-Value ratio is the percentage calculated by dividing the loan amount by the value of the property • Mortgages have a good yield and offer good security for the mortgagee Details

9. Terms of a Mortgage • Interest • Amortization period (e.g. 25 year amortization) • Term of mortgage (e.g. 5 year term) • Methods or Repayment (e.g. monthly, weekly, bi-weekly, semi-monthly, payout privilege, etc.) Note: all mortgage payments are blended, which means they are principal and interest combined – interest calculated semi-annually, not in advance Details

10. Mortgage Insurance • National Housing Act (NHA) protects lenders of high-ratio mortgages from losses resulting from borrower default • NHA provides for mortgage insurance to be available to NHA approved lenders (chartered banks, life insurance companies, credit unions, trust and loan companies authorized) • CMHC and GEMICO – companies that provide mortgage insurance under NHA Details

11. Homeownership and NHA Essential requirements are: • Housing must be intended for full-time (not seasonal occupancy) • Housing conforms, or can reasonably conform, to established construction standards • Not more than a reasonable portion of the borrower’s income is required for mortgage repayment purposes Details

12. 95% Financing Program • Maximum house price allowed for 95% financing in many areas is $250,000.00 • Maximum house price allowed for 95% financing in other areas is $175,000.00 • Insurance premium is 3.75% of loan • Financial gifts for down payment requirement may be met by gift from immediate family • Taxes will usually be part of payment PIT • Borrower must have 1.5% of price to demonstrate ability to cover closing costs Details

13. Funding Sources • Chartered banks, life insurance companies, loan corporations, trust companies, credit unions and Alberta Treasury Branch • Finance companies, private sources such as individuals, syndicates and estates administered by trust companies and lawyers • Business Development Bank of Canada, Farm Credit Corporation, Alberta Agricultural Development Corporation Details

14. Mortgage Financing and Realtor Seller, buyer, lender and agent influenced by different considerations: • Seller wants highest possible price • Buyer wants lowest possible price with best financing terms • Lender wants security at best interest rate • Agent want to satisfy all three to ensure a fair transaction Details

15. Understand the Basic conditions • Loans made only on real property • Borrower must be employed with income enough to repay loan • Borrower must have acceptable credit rating • Lending institutions set conditions • Amount of loan governed by loan-to-value ratio • Important to keep up-to-date as differences among companies exist Details

16. Foreclosure Foreclosure process is procedure mortgage lender may initiate to recover security if mortgagor stops making mortgage payments • Lender issues a Statement of Claim • If no defence filed, application is made to court for Order Nisi/Order for Sale • Normally a six-month period of redemption • If acceptable Offer received, Order for Sale applied for and property sold • If no acceptable Offer, court may grant a Final Order for Foreclosure and lender owns Details

17. Relevant Legislation • Real Estate Act (licenses / registers mortgage brokers) • Canada Interest Act (deals with interest charged on loans secured by mortgages – calculated not in advance, calculated is same as compounded) • Law of Property Act • Dower Act Details

18. Priorities of Claim to Land • First priority / exception to rule is Municipal Tax Arrears priority over mortgages (reason lender concerned about tax payments) • Claim must be on Title of land to be valid priority determined by date and time of registration • Claims against title are Encumbrances • Writ of Enforcement (direction from court - may have priority over mortgage whenever registered) • Builder’s Lien (registered within 45 days of work completed) • First, second, third mortgages, postponement (date/time) Details

19. 5 Cs of Credit for Qualifying • Character • Capital • Capacity • Collateral • Credit Details

20. Mortgage Application Process • Select lender • Lender’s valuation (value of property, buyer’s investment, buyer’s qualifications) • Commitment by Lender • Legal formalities (lawyer handles) Details

21. Costs Associated with Mortgages • Mortgage Insurance Fee (if applicable) • Legal work performed by lawyer • Fire insurance • Tax adjustments • Interest adjustment • Appraisals Details

22. Tax Adjustment • Taxes are based on calendar year (January 1 to December 31 but due June 30th) • Before June 30th, Buyer gets tax credit • After June 30th, Seller gets tax credit • Tax adjustment based on #ofdays/365($yearly taxes x #ofdays/365) Details

23. Tax ACCOUNT Adjustment • Tax Account based on tax year (July 1 - June 30) • Tax Accounts are savings for next June 30th • If assuming mortgage, Buyer will re-imburse Seller for Tax Account, Seller gets tax credit, Tax Account remains with lender • If new mortgage, Buyer creates tax account with mortgagee so that, combined with the tax portion of PIT payments left before June 30th, lender will have sufficient funds to pay • Adjustment may be in Mortgage Statement, or not, but it will affect the Cash required to Close Details

24. Interest Adjustment • Date mortgage funds are to be advanced from lender is Interest Adjustment Date • If mortgage funds are advanced prior to this date, interest is calculated from date funds are advanced to the Interest Adjustment Date • Interest is calculated using simple interest I=PxRxT(#ofdays/365) • Adjustment will be made with mortgage advance and will affect the Cash required to Close Details

25. Real Estate Contracts • Listing Contract – realtor to get mortgage verification form to lender • Purchase Contract – realtor complete Offer contract with purchaser, and with respect to financing in particular, filling in sections 2 and 8 accurately as well as financing schedule Details