The recent changes to mortgage financing rules set by the federal and provincial governments may make it more difficult for a prospective borrower to avail themselves of financing than ever before. That’s not the only thing potential home owners or property investors need to be concerned with, however.
Pauline Tonkin, an accredited mortgage professional, at national mortgage company Dominion Lending Centres, shared that the property one opts to purchase affects the success of a mortgage application.
“When lenders underwrite your application for approval they look at you as a borrower but they also evaluate the property,” she noted.
Here are some aspects to consider before you purchase.
1. The type of property
The lender will look at the age of the building, the history of maintenance or lack thereof and the location – especially for condos. Some lenders will limit their exposure with a maximum number of units in a building or avoid lending on buildings over a certain age for the property.
Properties with more than 4 units in them will be considered commercial real estate and the lender will assess them accordingly, while heritage homes need a more comprehensive review and special consideration for financing.
Leasehold and co-op properties also have specific requirements regarding the maximum loan to value ratio of the loan. Apart from additional documentation, a higher down payment may be required. Interest rates, meanwhile, will vary.
2. The location of the property
If the location limits the potential resale value for the property in the event of a default, lenders will be less likely to approve a loan. Some lenders will also lower the amount hey are willing to lend for a home located out of key market areas. They may also add a premium to the interest rate.
For properties with limited (or no) access to municipal utilities – e.g. water, heat, light and sewer – more pieces of information are required to assess the risk. Things like insurance coverage, water testing, seasonal access, and the condition of the property will be strongly considered by the lender.
3. The use for the property
If the owner-occupied house has a suite, rental income may be considered, There are also other lending criteria for a previous grow-op that can come with higher interest rates and costs.
In the case of a condo, the property may have a commercial component in the building, like shops below or a leasing space in the unit for business. In such cases, some lenders may not be convinced to finance. In other cases, the lender may allow with approval by the insurer (CMHC, for example).
A second home purchased for recreational use will require a review to see if the property has seasonal or year-round access.
If the property requires renovations, the extent and cost to the value of the property will be considered.
It is helpful to seek advice from mortgage brokers before one starts looking at any property. This gives an opportunity to discuss detailed requirements for the type of property you wish to purchase.