Why are Mortgage Rules so strict?
December 17 2012 Posted by Mary Poburan
Well, I’m not sure how I lost a week but last week Mondays with Mary did not happen. I’m sorry to disappoint my loyal supporters but I’m back on Track today.
Why Are Mortgage Rules so Strict?
Last week I spoke about the mortgage insurers in Canada. We all know that mortgage with less than 20% are required to be insured but did you know that many CONVENTIONAL mortgages are also insured? This is a confusing topic for most homeowners. Why would their mortgage be insured if they put down 20%? The fact of the matter is that some lenders provide “back end” insurance on many of their conventional mortgage products as a requirement from the institutional investor. Your mortgage along with many others is part of an investment pool that is combined to provide investors a safe and steady stream on income. Because investors rely on the income stream from those mortgages, they often insist that a majority of the mortgage in that pool are insured. Many people do not even realize this nor does it directly impact them in any way. The basic fundamental of this practice is why the U.S Mortgage market collapsed. The investors holding the mortgages basically had a useless investment. How do you have investment income when no one is paying their mortgages. In Canada, we are far more diligent in protecting ourselves and in turn have strict rules in place to ensure we do not follow in our Neighbors footsteps. For new mortgagors with more than 20% down, they should understand that if a mortgage is back end insured, the policies guiding their approval are dictated by the insurer. This is an important fact as the insurer could have more restrictive policies regarding the applicant or a property than if it was not insured.
When I am looking for the best financing fit for a client, it is imperative that I know if a lender back end insures. If a client has specific lending needs that do not fall under an insurers guidelines I will need to source out a conventional lender that does not back end insure. Insured mortgages may have a slightly preferred interest rate, but if we cant get approval based on policy, it won’t matter if the rate is slightly lower. The goal in obtaining a mortgage is ensuring it is the right product fit at the best rate. A recent trend is to offer better rates to clients choose to pay for their own insurance on low ratio mortgages. I have done the math and paying for this expense upfront is not justified in the rate savings. Be smart. Work with a knowledgeable broker who will worry about these things for you!
