House Appraisal before mortgage gets insured

[Nabber]

Originally Posted by shane_c

Well, we applied for and got a mortgage, signed the purchase agreement and are about to give the downpayment to the vendors but we find out that GE is wanting to do a house appraisal before they will insure the mortgage. The bank is still sending the papers through to the lawyers though in the hopes of not delaying our June 30th closing. GE is supposed to do the appraisal by Wednesday of this week. What can I do to be prepared for this? What will they be looking for? So far, the only thing I've done is print off a few similar places in the neighbourhood that are going for 10,000-30,000 more. I can't see why they would say it wouldn't be worth what we're going to pay given todays market but our luck that's what will happen.

Shane you have nothing to worry about, this procedure is almost standard when using alternative sources of financing, they always want an appraisal. Alternative as in non CMHC insured mortgages and private lenders. With regards to what you can do, the answer is nothing, just let them in to do the appraisal they will compare the houses for you, everyones city assessment is roughly $100,000 under market value so I'm sure you're fine.

[trew]

Originally Posted by ken0042

Right. I get all of that.

I just don't see how it is more of a risk "now that the market is getting frothy."

Why are things more risky now? Because people are being forced into making bad decisions. They need a place to live, and some are paying way too much. Even if there is no statistical bubble for the housing market as a whole, there are going to be a larger than normal amount of individual properties that will bleed red ink on resale when the market slows down.

My point about froth is that the rapid acceleration in property value in a short period of time has made a mess of the comparibles. Some people are radically overpaying for property, and they won't know it until the market slows down.

I'm talking about bad location, bad condtion, and for-whatever-reason inferior property, that is currently selling for same dollar value as whatever the sellers can claim to compare to. When the market is hot, everything gets swept under the carpet. The discount for flawed property is reduced, eliminated, or worse, ignored and bid over.

Whenever a buyer has selection, they avoid leaky condos, they avoid ex grow operations, and a certain proportion of buyers will avoid a series of less dire factors (living next to sound barriers, pink stucco, split levels, wood basements, whatever...). Those that don't immediately walk away, are looking to pay less then the market average for the statisical comparibles. (sometimes much less, particularly on busy streets.) Also, and perhaps more importantly, in a normal market, buyers excercize more caution take their time, and get conditions on the property they are purchasing.

CMHC used to make free money, the review process was a 5 minute glance at some paperwork and a rubber stamp. This was because the market was operating more towards the buyers dilligence, and properties found their price given enough time and adjustment. Nowadays, they can't trust the market forces, and are in the bonafied insurance and risk business.

In the end, I think it's a moot point. CMHC's behavior has obviously changed. They are taking pictures, sending people out to look at houses, and are turning down applications with increased regularity. Obviously there is a change in risk going on.

Originally Posted by ken0042

I just want to know why it's more risky for the lender today than it was a few years ago.

Actually, it's not really much more risky for the lender today. They either get 25% down, or CMHC insures the mortgage. I think the lenders are part of the problem, though, and perhaps could be accused of being lazy, defering to CMHC to do the legwork. I wouldn't doubt it if there are some houses that the bank would scrutinize more if a person put 25% down, than if they put only 10% down. The banks should be liable for getting clearance from CMHC before giving people the false belief that they can clear their financing conditions.

[mrdeeds]

The morgage insurers (CMHC and Genworth) are wary of the housing trends in the booming Calgary market. I see of lot of homeowners are trying to capitalize on the 30%+ increase in values in less than a year while none of the original equity is retained. This presents a risk to the lender and the insurer in the event that there is even a small market downturn coupled with rising interest rates.

If the mortgage is conventional, IE 25% down, an full appraisal is done on the property anyway. CMHC's automatic underwriting system uses property sales of comparable homes in the neighbourhood in the last 6 months to validate market value, but this system can be fooled and is not fraud proof. CMHC however rarely does actual appraisals in today's market. Genworth's property database is much smaller than CMHC's and therefore much more driveby and or full appraisals are requested.

[tvp2003]

I hope this isn't a thread hijack; I'm in a sort of the same boat, having just (over)paid for a townhouse. However, I'm buying a new development... one of the reasons why we went new is the fear of getting into a bidding war on house and not having the bank/lender giving a mortgage for the full purchase price because it didn't appraise high enough (leaving us to pay for the rest)... is this pretty common (especially in today's market)? It's our first home purchase so we're obviously less experienced, particularly in market conditions like this.

Originally Posted by MoneyGuy

BTW, do not under any circumstances (well, generally not) buy mortgage insurance. There is a far better option.

Can you elaborate? Do you just mean getting a term life insurance policy? I'll have to dig out my dog-eared Wealthy Barber book to remind myself what the different types of insurance are...

Originally Posted by MoneyGuy

Sounds like you're in your first house and you're young dn inexperienced, I'm guessing.

Yup, you are missing something. Do you think these prices only go up? They certainly do not. This market will correct eventually and when it does it can go down a lot. Witness the tech meltdown in 2000. House prices can shed 50K at these levels. Don't think it can't happen. It has before and will again.

The statement "a house I buy now for $300K will be worth $340K in a few months, how is that really a risk?" is pretty naive.

I'm not predicing a real estate meltdown in the next couple of years because the economy is too hot, but just understand that there are risks.

<< raises hand >> I think that describes us pretty well too, right down to the numbers I certainly expect that the market will eventually slow down... but to actually stop entirely or go down? I honestly can't see it happening anytime soon (it's like waiting for the price of gas to go back to 60 cents a litre)... especially compared to the housing costs in Vancouver and Toronto (Calgary is still pretty low compared to those 'big cities').

[MoneyGuy]

[quote=tvp2003]Can you elaborate? Do you just mean getting a term life insurance policy? I'll have to dig out my dog-eared Wealthy Barber book to remind myself what the different types of insurance are...
[quote]

Okay, important mortgage insurance lesson here. Few people know this. The problems with mortgage insurance (these apply to just about all mortgage insurance policies I've seen):

1. Motgage insurance is not portable. If you sell and move, you can't transfer your mortgage to the new property. If you've developed health issues, you might not be able to get new insurance, which is actually unlikely (see #2).
2. Mortgage insurance is underwritten at the time of claim. That means that virtually everyone gets it as it's underwritten the same as group life insurance. If you're young, healthy and a non-smoker, you get the same rate as some old, unhealthy guy who smokes like a chimney. Being underwritten at the time of claim means that if you would not have qualified for insurance if it was underwritten at the time of application, then you can pay premiums for years and not even have the insurance you think you do. There will be lawsuits over this one day.
3. Mortgage insurance is more expensive than life insurance. How much depends on age, health, etc., but the difference can be substantial.
4. Think about this one. It's a deal killer for me. Mortgage insurance premiums don't decline as your principal declines. Example: You take a mortgage for $200,000. Fifteen years later your mortgage is $90,000 but your premium is the same. If you die, you're paying for 200K of insurance but guess what, the insurer pays out 90K, but not to your beneficiary, but to the lender. Bad deal.
5. You cannot actually get the money from your mortgage insurance policy. It goes to the lender, with no option on your part.

Buy cheaper, more flexible life insurance. If your mortgage is 200K, but 250k of term life insurance. The extra amount can be used as creditor insurance. If you even take a loan that requires insurance, you have it and you can refuse the crap that the banks sell as creditor insurance, with similar shortcomings as with mortgage insurance. If you die owing 90K, it will pay out 250K to your beneficiary, who then can decide what to do with the money - pay off the mortgage, educate the kids, deposit into RRSps, whatever.

Do not buy mortgage insurance. BTW, the banks won't tell you this. Oh, yes, mortgage is sold by unlicensed, unqualified bank drones. Tellk 'em to take a hike.

If more questions, post here or send me a PM or email. good luck.

BTW, I'm a certified financial planner.

[White Doors]

Originally Posted by Mccree

Yes..I was talking about the CHMC insurance you can only avoid that if you put 25% down. I declined the other stuff too as I thought it was a waste of money.

Oh! CMHC! Yes, but at least you're getting raped by your elected official and not some faceless large corporation!

[White Doors]

I don't see the housing market going any way but up for the next 10 years at least.
1) There is a shortage of labour to build new houses.
2) Oil is going to hang around present levels. There will not be a price plunge on oil, barriing some miraculous breakthrough in hybrid technology or something like that.
3) Calgary has been under-priced for years and years.
4) Downtown office space is at a 0.2% vacancy rate. That is crazy low and is the lowest in North America in fact. Second only to Tokyo worldwide. Calgary is booming baby and it's going to continue for some time. Have a look at the construction projects on the go in this city - it really is quite amazing. Boomtown.

[shane_c]

Well, they came out this morning to see the place. Only took about 15 minutes. Says he will figure some stuff out and do a comparison vs. similar selling prices in the area for the last 6 weeks. Should have an answer back by tomorrow. Now we wait...........

[Barnes]

PS Shane...
Our evaluation came back bang on to what I thought we could get at the very least.

[shane_c]

Originally Posted by Barnes

PS Shane...
Our evaluation came back bang on to what I thought we could get at the very least.

Based on the luck we have I wouldn't be surprised if this all comes to a grinding hault. I'm so tired of all this and just wish it was over with. The past month of dealing with all this mortgage crap has been very stressful. Congrats, you have a mortgage. Ooops, no you don't. Actually yes you have it again. Ooops, sorry we thought everything was finalized but we forgot that GE hasn't agreed to insure the mortgage. When will it end. Uggg.

[ken0042]

I feel your pain buddy. I went through the same type of thing. I told the mortgage broker that I was dealing with exactly what bad stuff was on my credit, he said no problem, go ahead and pick out your options on your house so we can get the exact total. 3 days later he asked me "What the fata is this on your credit report from 5 years ago!" (It was exactly what I told him would be there.) A few days later he said he could get me a mortgage, but it would cost me a good chunk of my deposit, and my mortgage would now be at 12%.

Thank God I found my current realtor. Doing an assumable with him was so painless, I kept asking him when to expect the shingaurd to hit the fan. Biggest problem I faced was my housing inspector was 5 minutes late. It was such a relief to have everything go so smooth at that point.

[MoneyGuy]

For those of you intending to shop around for a mortgage, don't. It will probably harm your credit rating. Use a broker. It will keep your credit score intact, assuming it is good now.

[shane_c]

Just got word from our broker that the appraisal went through okay and now it's time to go sign all the papers with the lawyer. Woo Hoo!!!!!!!!

[ken0042]

That's good to hear Shane.

The only thing that kinda sucks for you......... when you buy your first house you typically have a house warming party. That's going to be a little odd if you've already been living there for a while.

[MoneyGuy]

Originally Posted by White Doors

I don't see the housing market going any way but up for the next 10 years at least.
1) There is a shortage of labour to build new houses.
2) Oil is going to hang around present levels. There will not be a price plunge on oil, barriing some miraculous breakthrough in hybrid technology or something like that.
3) Calgary has been under-priced for years and years.
4) Downtown office space is at a 0.2% vacancy rate. That is crazy low and is the lowest in North America in fact. Second only to Tokyo worldwide. Calgary is booming baby and it's going to continue for some time. Have a look at the construction projects on the go in this city - it really is quite amazing. Boomtown.

No way the Calgary market or any other goes any way but up in the next 10 years.

I remember people were saying this in 1999 about tech and look what happened. I'm not saying wer'e in for a 2000-style real estate correction,but this irrational exuberance looks erily familiar. I'd bet my house there will be a correction in the next 10 years.

[shane_c]

Originally Posted by ken0042

That's good to hear Shane.

The only thing that kinda sucks for you......... when you buy your first house you typically have a house warming party. That's going to be a little odd if you've already been living there for a while.

That wouldn't suck too bad since everyone will be expected to bring money

We've been renting the place the last year, but honestly that's okay because now we don't have to pay to move, we know the area is a good one, the neighbours are nice, and we know that the house is structurally sound.

[Cube Inmate]

Originally Posted by MoneyGuy

For those of you intending to shop around for a mortgage, don't. It will probably harm your credit rating. Use a broker. It will keep your credit score intact, assuming it is good now.

I've recently read that the ultra-secret scoring system can tell the difference between making multiple credit applications because you *need* lots of credit (bad) and shopping around (not bad). Are you privy to the details of the scoring system(s), or are you just assuming?

[MoneyGuy]

Originally Posted by Cube Inmate

I've recently read that the ultra-secret scoring system can tell the difference between making multiple credit applications because you *need* lots of credit (bad) and shopping around (not bad). Are you privy to the details of the scoring system(s), or are you just assuming?

I'm not assuming. I'm a financial planner and I refer lots of clients to a mortgage broker that I trust and respect. She's explained this to me. Average credit (called beacon) score is approximately 650, with a max of around 900 (not sure of the numbers). A low score of ~500 or so is very bad news and you'll pay higher rates.

Many things damage your credit score. If you have certain credit cards (dept store cards) and you're even one day late it shows up on your score. Another that damages your score is the number of credit checks on your record. That's why I advised folks on here not to shop around for a mortgage. If you go to six banks for quotes, all six do credit cheques and these show up on your record and it reduces your score.

Hint: You know those booths you see at malls for free t-shirt if you apply for a credit card? Don't do it. They check your credit rating and it affects your score.

Okay?

[White Doors]

Originally Posted by MoneyGuy

No way the Calgary market or any other goes any way but up in the next 10 years.

I remember people were saying this in 1999 about tech and look what happened. I'm not saying wer'e in for a 2000-style real estate correction,but this irrational exuberance looks erily familiar. I'd bet my house there will be a correction in the next 10 years.

I'll take that bet, no problem.
Real Estate very rarely ever goes down. We'll see I guess.

[Cube Inmate]

Credit scoring explanation from the source...a Fair Isaac website says

"Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score."

I read on another website that the "short period" mentioned above is around 14 days. When you add in the fact that the FICO scores may or may not include credit inquiries from the previous 30 days (it's a secret!), you'll realize that it's impossible to empirically test the effect of making 1 mortgage application versus making 5 in a 2-week period.

So, MoneyGuy...I asked if you were privy to the details of the scoring system, and your answer seems to be a definite negative (my addition of "are you just assuming" was not exactly appropriate, however). And although I don't doubt your mortgage broker's understanding of credit scoring, I doubt that she has access to the FICO formula either.