5 Feb

Banks vs Credit Union – A Who’s Who in Borrowing

General

Posted by: Sharlene Scott

Banks and Credit unions are often grouped together into one category under “financial institutions”. While they may have several similarities in terms of financial service offerings, in the world of mortgages the banks and credit unions have little in common. As mortgage professionals, we work with both of them and are well versed in the differences between the two. To start with, we will first need to look at the definition of each institution.

A BANK

A bank is a financial institution that accepts deposits, lends money and transfers funds. They are listed as public, licensed corporations and have declared earnings that are paid to stockholders. A key point: they are regulated by the federal government-Office of the Superintendent of Financial Institutions.

A CREDIT UNION

Credit unions also deposit, lend and transfer funds. However, after that, we run into some differences between the two. Credit Unions have an elected Board of Directors that consist of elected members from their community. They are local and community-based organizations and unlike the banks, they are not federally but Provincially regulated.

Now that we have to clear definitions, we are going to focus on just one of the differences between the two: Who they are regulated by. Credit Unions are not regulated by OSFI therefore, they are not always subject to the mortgage lending rules imposed by the federal government (at least not right away). Take for example the recent changes to the B-20 guidelines. Since Credit Unions are not classified as a Federally Regulated Institution, they currently do not need to comply with the implications listed in the new rule changes. What does this mean for the consumer? Let’s walk through an example.

Say you have a dual income family with a combined annual income of $85,000. The current value of their home is listed at $700,000 and they have a mortgage balance of $415,000. Lenders have agreed to refinance to a maximum amount of 80% LTV (loan to value). That gives us a total of $560,000 minus the existing mortgage and you have $145,000 available provided you qualify to borrow it.

Now let’s put the Bank and the Credit Union toe-to-toe:

Difference between Bank and Credit Union when Refinancing

That means you are able to qualify for $105,000 LESS with the bank when refinancing!

Take the same scenario listed above and let’s apply it to purchasing:

Difference between Bank and Credit Union when Purchasing a Home

Again, you have a reduced amount of $105,000 towards the purchase of your new home.

A few disadvantages to Credit Unions that you should be aware of:

  • You cannot port your mortgage out of province
  • With the introduction of the new B-20 guidelines, there has been an increased demand for Credit Unions. This increasing demand has led to higher rates and sometimes these are not the most competitive for the client. Working with a broker can ensure that you receive the best rate and product for your situation.
  • Credit Unions also have a typically lower debt qualification ratio for how much house you can afford and how much debt you can carry

With those considerations, there are limitations to what Credit Unions are able to offer you. As always, working with a Dominion Lending Centres mortgage professional is one of the best ways to ensure you are not only getting the sharpest rate, but also the best product for you and your unique situation. Give us a call today-we would love to talk to you about your options and how we can help you.

Written By: Geoff Lee, Dominion Mortgage Group

26 Jan

What is a Property Assessment vs a Home Appraisal?

General

Posted by: Sharlene Scott

It’s the time of year when many homeowners are getting their property assessments.

The real estate market is the single biggest influence on market values. Market forces vary from year to year and from property to property. The market value on an assessment notice may differ from that shown on a bank mortgage appraisal or a real estate appraisal because an assessment’s appraisal reflects the value at a different time of the year, while a private appraisal can be done at any time.

Use your Assessment as a starting point for the value of the property your planning your home purchase… Do not rely on a provincial assessment for the exact value of the property you’re considering purchasing. Markets can change quickly both increasing and decreasing in value depending on the area.

What is a Home Appraisal?
An appraisal is a document that gives an estimate of a property’s current fair market value.

Often there is no connection between a provincial assessment and appraised value. This is why lenders want an appraisal – an independent evaluation of the properties value at this moment in time.

Primarily home appraisals are completed at the request of a lender. Lenders want to know the value of a property in the current market before they are willing to lend against the home.

The appraisal is performed by an “appraiser” who is typically an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question, trained to render expert opinions concerning property values.

When an appraisal is done, consideration is given to the property, the home, its location, amenities, as well as its physical condition.

Appraisals may also be required when an owner has less than 20% down payment and needs mortgage default insurance.

Who pays for the Home Appraisal?
Typically, the borrower pays the cost of the appraisal, and upon completion, the appraisal goes directly to the lender (does not go into the home buyer’s hands).

I know it sounds odd, but brokerages, lenders and appraisers cannot just show the buyer the appraisal on a property, even though the borrower paid for it.

Think of an appraisal as an administrative fee for finding today’s current value of the property
You need a Home Appraisal since the lender doesn’t want to lend on a poor investment and the appraisal helps the buyer decide if the property is worth what they offered (especially in hot markets like Vancouver & Toronto).

Why don’t you get a copy of the appraisal? The appraiser considers their client to be the lender (the reason the appraisal was ordered). The lender has guidelines for the appraisal, and the appraiser prepares his report according to those parameters.

The lender is free to share the appraisal with the borrower, but the appraiser cannot share it. This is because the lender is the client… NOT the borrower!! It doesn’t matter who pays for the appraisal.

Sometimes an appraisal can come in lower than the purchase price, causing angry calls to the Appraisal Institute of Canada (AIC), and the answer they give is: the Brokerage or Lender is the client of the appraiser, and as such has ownership of the report.

One of the main reasons the buyer pays for the appraisal, is that if the mortgage doesn’t go through, the lender does not want to be on the hook for paying for the appraisal and not getting the business.

Lenders are also aware that home buyers could take the appraisal and shop it around with other Lenders to try and get a better deal.

It is rare for Lenders to share the report. With most appraisal companies, the appraisal is only provided after the closing of the mortgage transaction and must have the lender’s approval.

After the funding of your mortgage, some mortgage brokers will refund the appraisal fee or sometimes the lender may agree to reimburse the cost of the appraisal.

While a lender does not have to release the entire appraisal, there are some pieces of information that remain the personal property of the buyer, and PIPEDA legislation guarantees them access to that. However, any information on the report that does not relate to the property itself (such as the neighboring properties or other data about the community) would come off the report before the lender provided it.

Some other reasons for getting an Appraisal:

  • to establish a reasonable price when selling real estate
  • to establish the replacement cost (insurance purposes).
  • to contest high property taxes.
  • to settle a divorce.
  • to settle an estate.
  • to use as a negotiation tool (in real estate transactions).
  • because a government agency requires it.
  • lawsuit

Getting your home ready for an Appraisal:
The appraiser report involves a report including pictures of the home and property with the appraiser’s value of the property, along with a short summary of how that information was derived.

9 tips for high value home appraisals

Most lenders have an approved appraiser list which requires appraisers to have the appropriate designation. Lenders tend to reject appraisals that are ordered directly by property owners. Lenders want the appraisal to be ordered by the broker or the lender, primarily to avoid potential interference from the property owner.

Home Appraisal Costs
Appraisal costs do vary. Most home appraisals start around $350 (plus tax) but they can go much higher depending on how expensive the home is, complexity of the appraisal and how easily the appraiser can access comparable data.

Are you thinking of buying a home? As you can tell there is lots to discuss, call me today to have a chat!

Written by: Kelly Hudson, Dominion Lending Centres