Another important reason your mortgage is denied

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Please note I am not a mortgage broker. The below is for information purposes only.

You decided to become a home owner, saved for a down payment, got pre-approved for a mortgage, found your dream home and made an offer.

Then, to your surprise and dismay, your mortgage application is denied. Hopefully, your offer was subject to mortgage approval!

yes, it is still possible for a mortgage to be denied after pre-approval

And it is not necessarily for the reason you think. A mortgage pre-approval is the maximum amount a lender would loan you, based on your income, down-payment and credit history.

Once you made an offer, the documents go through an Underwriter. The role of the Underwriter is to assess whether your loan request is an acceptable risk to the lender….or not.

Besides income and down payment, there is a crucial detail the Underwriter will focus on: the property itself.

a mortgage can be denied if there is an issue with the property

Lenders  want to ensure their “investment” will provide a handsome return for as long as possible. They also want to make sure they are not overpaying and that the collateral – i.e. the property- is safe and sound.

In order to determine this, a lender will look at both the physical life and the remaining economic life of a property.

To simplify, it means the current state of the property and how repairs can extend its life. An appraiser is usually used to determine the above points.

If the appraisal doesn’t check out, the application is usually denied. For example, most lenders are wary about financing foreclosures, even if you do and pay for any repair.

the type of property can also cause problems

In Canada, most lenders ask for an appraisal for single, detached houses. If you are buying a condo, you are not necessarily off the hook either.

The underwriter will definitely take a look at the building history, finances and current conditions.

Too many tenants? Your application could be denied. Tenants do not have a personal stake in the building and can be perceived as detrimental by some lenders.

Building needs major repairs? Your application could be also be denied, particularly if the strata corporation does not have the money to pay for them.

Buying on plan? Potentially denied. A lot of lenders won’t finance “non-existent” properties, or will only finance if at least 70% of units are sold.

final word

Mortgage underwriting is a complex process. Different lenders have different criteria. The industry is also heavily regulated and constantly changing.

If one lender denies you, try another one. If it fails, you will have to look at other properties, and although disappointing, it may not be a bad thing in the long run.

Book review: Pound Foolish by Helaine Olen

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Please note I did not receive any compensation for reviewing this book.

As a personal finance aficionado, I always enjoy reading blogs and books on the subject.

this week, I will review Pound Foolish by Helaine olen

Helaine Olen is a journalist, writer and columnist. As she admitted in her book, she did not know anything about personal finances when she started writing about the subject. She does not have academic qualifications in Finance, nor is she a CFP®.

pound foolish does not give financial advice

And it is refreshing. Olen actually challenges some of the conventional, financial wisdom we have been reading and hearing for decades such as the Latte factor or the fact that owning a house is automatically a sound financial plan.

Most of all she challenges the concept of financial literacy, particularly when those who wants to teach it are banks, credit card companies and other financial entities making profits on our hard earned money.

the book was written just after the 2008 economic downturn

It makes its content even more relevant, as it is backed-up by actual events and facts.

even if it is primarily geared towards the US, you can still relate to it

Helaine Olen primarily focuses on the personal finance industry in the US. That being said, some of the concepts she talks about are fairly common in many countries, such as gender inequality, wages stagnation, rising costs of housing, education and healthcare.

final verdict: buy

I gave this book a definite buy. I really like the way Olen challenges and shakes up the personal finance world. Not too mention what she writes is very true.

 

The problem with personal finance blogs

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I totally understand the post you are about to read may confuse you, and even more so since I am a personal finance blogger who has been blogging about personal finances for almost 3 years.

That being said, I believe it is also important to have perspective.

PF blogs are either too generic or too specific

A lot of blogs out there are either about extreme frugality, early retirement, stock investing or becoming debt-free. If you don’t fit in any of these categories, it is hard to relate to these blogs and the bloggers behind them.

Same goes with geographic location. A lot of blogs are written by US residents. Well, I live in Canada so that does not necessarily help me.

It is one of the reasons most people create their own blogs in the first place. I was no exception.

most pf blogs are written by non-specialists

This is a highly sensitive area I am coming to. The majority of people blogging about personal finances have no background in it whatsoever. Quite a few are writers trying to cash in on the popularity of the subject.

Writing is also influenced by personal experience. Bloggers are sharing tips and advice because it worked for them. By extension, it should work for everybody else, right? Wrong!

In order to work, financial advice has to be personalized. You don’t get this in PF blogs. It is crucial for readers to always check facts and not take the advice too literally.

PF blogs are repetitive

How many times have you read that you need to save money for retirement or have a budget?

Don’t get me wrong, basic financial advice is and will always be needed. It is a foundation to build on. But we also need different takes and perspectives in order to progress.

So, that what my blog will be aiming to do from now on. Readers will still see basic advice from time to time, as it allows for a broader audience. But, there is some conventional wisdom that can and needs to be challenged.

 

Book review: Burn your mortgage by Sean Cooper

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Please note I did not receive any compensation for reviewing this book.

As a personal finance aficionado, I always enjoy reading blogs and books on the subject. I decided to start reviewing what I read.

This post will talk about “Burn your mortgage” by Sean Cooper

Let’s start by briefly telling who Sean Cooper is. He is a pension analyst and freelance writer based in Toronto. Most of all, he is an expert at personal branding and self-marketing.

A couple of years ago (2015), he made the last payment on a mortgage he had taken 3 years before.  Cooper managed to grab the attention of a few medias in North America and one in England, after massive campaigns on social medias. He, of course, also caused quite a commotion in the Personal Finance blogosphere.

Since then, he has been surfing the (media) wave and cashing in by writing the above-mentioned book. He also provides fee-only financial advice, without being a CFP® or having any formal qualifications in Finance, at least according his LinkedIn profile and Google search.

his book should have been titled “getting ready for your mortgage” instead

It really is all there is to it, quite frankly. Chapters after chapters of very basic, rehashed financial advice such as how to budget, use a credit card, save for a down-payment, packing your lunch and use public transit whenever possible….!

Some of the advice presented is actually not that great, such as making a free-subject offer on a property. This could end-up being very costly, if things don’t go as planned. Also, being “pre-approved” for a mortgage does not mean being “fully approved”.

there is only one chapter on how to actually “burn your mortgage”

To save you time and money, it all boils down to:

  • Making accelerated payments
  • Using prepayment privileges to the maximum
  • Taking a shorter amortization period
  • Refinancing if interest rates are too high
  • Becoming a landlord if possible

Boom!

final verdict: pass

Don’t waste your money on this book. If your knowledge of Personal Finance is intermediate or advanced, you won’t learn anything new.

If you are a total beginner, you can find all the information presented in the book online for free, including on this blog.

I personally found this book to be very boring. A definite pass!

 

How I increased my savings by 850% in 4 years

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I have been in both contemplating and calculating modes lately. I realized I have come a long way financially, since my old days of  being in denial about my monetary situation  crisis.

It took 2 major events to really galvanize me into action: realizing I had hit 25K of consumer debt & student loans and becoming a home owner. These did not happen simultaneously.

When I bought my first condo in 2013, I became house rich but also cash poor. Pretty much all my savings went towards the down-payment and closing costs. On top of that, I had to spend an extra $ 1 400 to replace 2 appliances that died within 3 weeks of me moving in. And, I still had debt to pay off….yikes!

But, I did it.

No, it was not always easy, and yes, I also had a little help from the sale of my first condo. That being said, only a tiny portion of the proceeds went towards my savings. Most of them were used to buy my current condo and pay-off my consolidation loan.

Before I start explaining how I accomplished this, let me clarify and be honest on a couple of points:

  • 850% is a big percentage. However, in 2013, the balance of my various savings’vehicles was very low. I did not become a millionaire.
  • As indicated above, the majority of the proceeds from the sale of my condo is not included in that figure.

i drastically increased my income

This is the number one reason I was able to increase my savings while paying-off debt and being a home owner. If you were hoping for a get-rich-quickly scheme, sorry to disappoint you! Only a very few personal finance blogs insist on this, but earning more is actually the best way to achieve your goals and dreams.

I didn’t buy too much house

Living in the Lower Mainland, I had to adjust my expectations. Owning in the city Vancouver will never be a possibility, and I am fine with it. That being said, with the amount that my mortgage broker qualified me for, I could have bought a bigger place. I didn’t, as my housing costs would have been way too high. Right now, they are sitting at 34% of my net income.

i didn’t buy too much car

Quite frankly, I don’t understand people spending an astronomical amount of money on a depreciating asset. A car looses value the moment it leaves the dealership. I also don’t understand people trading-in cars every 2 or 3 years thus staying trapped in a perpetual monthly payment cycle. Did I mention anything about people taking on 7-8 year long car loans? Or rolling old car loans into a new one, therefore owning more than the vehicle is worth?

My subcompact car will be paid off in 13 months. I plan on keeping it for at least 5 to 7 years afterwards.

i was -and still am-very disciplined

I always pay myself first. I have automatic withdrawals from my chequing account to both my TFSA and RRSP aligned with each paycheck. I am paid on bi-weekly basis, meaning I receive 26 paychecks per year instead of 24. Over the last 4 years, I was also blessed with work bonuses and tax refunds. I have reinvested the huge majority of these easy financial boosters. Many times, I was tempted to blow these away. I am glad I didn’t.

but wait, what about your other expenses?

You might ask. It is a legitimate question. I definitely do my best to keep them at reasonable levels. That being said, with all the above points, I don’t sweat that much over them.

final word

It was not always easy to simultaneously save and pay-off debt and pay for regular expenses. But, I am proof it is doable. Now I am almost debt free, I feel like the best is yet to come, financially speaking.

 

Buying a foreclosed property

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Note: I am neither a Realtor® nor a Lawyer. This post is for information purposes only. It also focuses on the province of British-Columbia, where I live. 

A property is considered in foreclosure when a lender obtains  an order of sale from a Court and the owner is unable to redeem the property. In plain terms, this happens when an owner is behind on their mortgage payments.

Let’s take an overview of the process for buying a foreclosed property, as it differs from buying a traditional property.

the price on a foreclosure will be close to market value

Unlike in the United States for example, Canada’s Courts protect the owner, not the lender or the buyer. The sale price is as to be close to market value as possible. You won’t be able to buy a property at a deep discount. Lenders work with a Realtor® and the property is listed on the MLS®.

That being said, the listing price will usually be lower. There are a few reasons for this: the property is usually sold to the highest bidder in court, the property is sold “as is”, and if after all fees are deducted there is a profit, the lender has to write a check to the owner….most lenders don’t want to do this.

the only subject you can include is “subject to court approval”

That’s right, you are reading correctly. Unlike a regular purchase, you cannot include the usual subjects like financing, home inspection, review of documents etc…in your offer. This is a legal requirement. The offer presented in Court has to be free of subjects. When the lender/trustee approves your offer, you have five business days to get your affairs in order, i.e. obtaining financing, do a home inspection if you can etc…

This can be a bit tricky, which brings me to the very important next point.

YOU ARE BUYING THE PROPERTY “AS IS, WHERE IS”

Neither the lender or the Court makes any representations or warranties as to the condition of the property. Many documents may not be available to review. There will be no property disclosure statement. Chattels are not included in the sale, as the lender does not own them. A chattel is an item that is removable from the property, such as appliances. In an nutshell, you assume all the risks related to the condition of the property.

A lot of lenders will also not finance foreclosures.

once accepted, your offer becomes public

When the lender accepts your offer, a date in Court is set. Your offer is part of the public court filing for everyone to see.

be prepared for court

On the set date, you need to be present. You also need to have a deposit in hand. Unlike, a regular purchase, the deposit needs to be included with your offer.

The Judge -or Master-  will ask if the owner can redeem the property. If not, they will ask if they are any other parties interested. If yes, this is when the bidding war occurs. You only have one shot at this. All bids are presented in sealed envelopes. Usually, the property is sold to the highest bidder and/or the bidder with the highest deposit.

If the judge approves your offer, it becomes legally binding as the only subject is removed. You also need to pay close attention to details like spelling, names and legal description of the property, as there is no title transfer in a foreclosure. Instead the Order Approving Sale is filed at the Land Title Office. If there are mistakes, the Office could refuse it.

final words

Buying a foreclosed property is definitely not for the faint-of-heart. Should you decide to take this route, you will need to leave your emotions at the door. You will also need to be patient, as the process takes more time.

Don’t be lured by the perceived lower price. Since you are buying “as is”, you have no idea of the actual condition of the property. You could face big costs upon possession.

 

 

 

Segregated funds explained

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Please note I am not a financial adviser or an insurance broker. This post is for information purpose only. 

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Segregated funds have always been a highly debated product. After years of stagnation, they are making a come-back. In 2015, the total amount of money held in segregated funds in Canada rose by close to 17%.

But, what is a segregated fund?

A segregated fund or -seg- is a product combining both investment and insurance. To sum it up, it works like an “insured mutual fund”. The insurance portion guarantees 75% to 100% of the principal invested. Monies are invested in stocks or bonds.

Segs are considered an insurance product and are usually sold by insurance companies. That’s it for the basics.

what are the advantages?

The main perk of this product is that you are guaranteed to receive the majority of your money back. If the investment portion performs well, you could actually end-up with a lot more money.

The insurance portion also offers a death benefit that is not subject to probate. The money held is also protected from creditors. Should you file for bankruptcy, your seg is off-limit.

what are the DISADVANTAGES?

Segregated funds are very expensive. The management expense ratio -MER-on these products can be easily over 3%. As a reminder, the MER is deducted from the fund’s return.

Your money is also locked-in for 10 or 15 years, depending on the contract. If you decide to cash out before the term, you will be paying a hefty penalty and deferred sales charges. They are very few “no load” segregated funds. “No load” means you are not paying any fees for buying or selling.

Because segregated funds are insurance products, they do not have to comply with the new CRM2 rules on investments. Holders are largely kept in the dark as to the actual costs of their segs.

who are segregated funds for?

They could be of interest for:

  • Self-employed people or small business owners mainly to protect their assets from creditors
  • People who are really, really terrified of market risk and close to retirement
  • People who are in very poor health and at a very high risk of dying soon

final word

To be honest, there aren’t that many people who actually benefit from having segregated funds. Better and cheaper results can usually be achieved by purchasing a separate life insurance policy and investments.

Just like any financial product, you need to do your own research and cost-benefit analysis to see if a segregated fund makes sense for you.

Choosing a Financial Advisor

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Over the last week or so, 3-time Olympian Harold Backer has made headlines here, in British-Columbia, and not for the right reasons. After retiring from rowing, Backer became a Financial Adviser and Mutual Fund representative. He mysteriously disappeared in 2015 amidst allegations of defrauding former clients. He turned himself in last week and has since been charged with two counts of fraud over $ 5 000.

this story illustrates how badly the financial services industry needs to change

The industry is largely unregulated. Anyone can set-up shop and call themselves a Financial Adviser, a Financial Consultant, a Money Coach, a Personal Finances Expert. You do not need any particular qualifications or experience.

Unfortunately, most canadians do not seem to care and are far too trusting

I don’t know which one I find scarier here, to be honest. A lot of personal finances bloggers also call themselves “experts” when they are anything but. This a post for another day.

So, how do you choose a Financial Advisor?

first, look for the following credentials

The Financial Services landscape is full of designations that can be very confusing. Unlike the Accounting profession, there is no talk of “unifying”.

  • Certified Financial Planner®: this is the “Gold standard” of the profession. This designation is international. To obtain it, candidates need to take classes in Financial Planning, pass exams and have a minimum of three years of relevant work experience. In Canada, the CFP® designation is administered by the Financial Planning Standards Council.
  • Personal Financial Planner®: this an alternate designation, administered by the Canadian Securities Institute. It is very similar to the CFP® designation.

A lot of Financial Planners also have one or more of the following specialized designations:

  • Chartered Investment Manager®: a CIM® usually handles and manages portfolios of wealthy clients.
  • Chartered Financial Analyst®: a CFA® also handles and manages portfolios. They also do research and analysis on companies, stocks and other securities.
  • Trust and Estate Professional®: a TEP® is very knowledgeable in estate planning and management, trusts, wills and taxation. Note a TEP® does not replace a lawyer or notary.
  • Chartered Professional Accountant ®: a CPA® prepares and analyses financial records for companies and non-profit organizations. They also do tax returns.
  • Chartered Financial Consultant®: a CH.FC® specializes in retirement planning and wealth accumulation.

The five above designations are very good complements to a CFP® or PFP® designation. However, as stand-alone, they are not enough to provide comprehensive financial planning.

Ignore the LLQP and Mutual fund license

The LLQP is for people who want to sell insurance products. These two credentials do not cut it to provide sound and objective financial advice.

Then, LOOK FOR A FEE-ONLY ADVISER

In my opinion, this is the best way to receive unbiased advice. A fee-only planner will charge you for their time. Some will charge you a percentage based on the total value of your assets.

It will definitely be more expensive than meeting with an adviser at a bank. The main difference is that a fee-only planner will not sell you any products and will put your interests first.

Experience is a bit more relative. Education is key when it comes to choosing a Financial Planner.

 

Term insurance vs. permanent insurance

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Please note I am not a licensed insurance agent. This post is to give general information only.

Life insurance is probably one of the most confusing and complex financial product out there. In the PF blogosphere, it seems like pretty much everyone is touting term insurance as the only way to go while permanent insurance is shamed at every turn.

unfortunately, life insurance is not so black or white, all or nothing

There are a few considerations you need to look at before deciding what type of insurance is best for you, namely for how long you will need life insurance, your health, your family status, your financial situation and estate.

to simplify things, here is a basic comparison table

 

Term insurance Term 100 (permanent) Whole life (permanent) Universal life (permanent)
Coverage length specified period lifetime lifetime lifetime
Payout only if the insured dies during the term guaranteed guaranteed guaranteed
Premiums usually increase at renewal remain the same remain the same remain the same
Medical questionnaire/exam depends on the insurer, age and amount required depends on the insurer, age and amount required depends on the insurer, age and amount required depends on the insurer, age and amount required
Cash surrender value (if policy is cancelled) no usually no yes yes
Investment component no usually no yes, controlled by the insurer yes, more flexibility and choice for the insured
dividend and interest payment no usually no yes yes
Borrowing component no usually no yes, against cash value; decrease benefit amount if not repaid yes, against cash value; decrease benefit amount if not repaid
Use as collateral no usually no yes yes
Riders or adds-on usually no yes, additional benefits can be included yes, additional benefits can be included yes, additional benefits can be included
Overall cost cheaper more expensive very expensive very expensive
Other notes very difficult to obtain after 70-75 can be obtained up to 85; premiums cease at 100; coverage remains can be obtained up to 85 can be obtained up to 85
The major advantage of term insurance is the cost

This is mostly because the odds are in the favor of the insurer. It is very unlikely the insured will die during the term, particularly if they are young.

the main problem with term insurance is that you have nothing to show for it

You pay premiums for a determined period, but once the period has expired, you are basically back to square one. In determining the type of insurance you want, you have to be honest about how you feel about the above point.

the main principle behind term insurance may not be valid anymore

The basis for term life insurance is that as you age, your savings and assets grow, and that by the time you retire, you will have sufficient funds to cover final expenses such as funeral costs, estate taxes or probate fees.

Unfortunately, a lot of people do not accumulate enough wealth during their working years. We also tend to still be in debt upon retiring.

Last but not least, most of us will live well beyond 70-75 years.

the main benefits of permanent insurance are that payout is guaranteed and coverage is for life

Depending on your personal situation, it can make sense to have permanent insurance. For example, if you die at a ripe age with considerable wealth and your heirs are not your spouse or children, the taxes on your estate will be huge. If you want to leave a legacy, you are going to need money.

that being said, permanent life insurance distorts the definition of insurance

Insurance is a tool to replace lost income/property or to cover for a shortfall. It is not meant to build wealth. The returns on the investment component is usually not that great.

the biggest drawback is definitely the cost

Premiums are 4 to 5 times higher than with term insurance. You definitely need to crunch some numbers to see the total cost of your policy over the course of your life. Depending on where you are at, you might be able to save and invest that amount yourself.

final word

I have been reviewing my affairs recently. Although I am single, it doesn’t mean I don’t need coverage or that I don’t need a will.

Based on my personal situation, I am leaning towards a term 100 insurance. This type of insurance would provide me lifetime coverage without all the fuss associated with the investment and borrowing components. It is also slightly cheaper.

Financial milestone: consolidation loan fully paid-off!

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Yesterday, I made a lump-sum payment of a little over $ 8 000, effectively putting my consolidation loan to its final resting place.

Beyond the excitement of being finally rid of this loan, I felt a huge relief and also like a weight had been lifted off my shoulders.

until i saw the balance at zero, I hadn’t realized how much this loan was weighing me down

I initially took out this loan in 2011 to consolidate my student loans, a pretty much maxed-out line of credit and a couple of credit cards. At the time, the total amount was about $ 25 000, with almost half of it in student loans.

If you are wondering how I got to be $ 25 000 in debt, please read my story.

Fast forward to 2014, the loan was down to $ 13 000.00. Clearly, consolidating worked for me.

Unfortunately, I had bought a condo in a building that was not in great shape and I found myself faced with a special assessment of $ 6 000.00 for repairs.

Alas, I did not have that money saved. I had bought the property the year before, and my savings were at around $ 2 000.00. So, I went back to the bank and consolidated again.

I was back to being $ 19 000.00 in debt

It was crushing, and not just financially. I started suffering from debt fatigue. I felt like I would never get out of debt. This loan and the payment amount associated with it started becoming a permanent part of my identity.

then, i decided to fight back

After all, I had dug the financial hole I was in, and it was my responsibility to climb out of it.

I decided to throw in an extra $100 per month towards the “beast”, on top of the bi-weekly payments I had to make.

I had calculated I would pay off this loan 9 months ahead of schedule by doing this.

i lucked out with the sale of my condo

Yes, the very same condo that got me further into debt got me out of it. Ironic, I know. I sold the property last year, at over-asking price. Initially, I hadn’t planned on selling just yet. You can find the details here and here.

So why had this loan not been paid off earlier, you are probably wondering. Because I also had other competing priorities, like a lot of people.

I repaid the amount I had taken out of my savings for the deposit on the purchase of my second condo. Then, I bumped up my emergency fund, which was, for me, a necessity.

The lack of emergency fund is what got me into debt in the first place. I don’t want to be in that situation again.

My parents also came to visit me, and yes, I used some of the proceeds to enjoy my time with them. I don’t regret doing that for one bit!

Last but not least, I initially wanted to pay-off my car loan instead, as the amount was slightly lower and I would have owned my car outright.

I debated quite a bit and it took time to reach this decision. I am glad I did. The consolidation loan amount was for a longer period and a higher interest rate. I also had it for too long.

i saved $ 2 000.00 in interests

My bank periodically sent me information about my loan agreement. If I had let this loan run its full course, I would have paid an extra $ 2 000.00.

i now have more options, and it is freeing

It is really liberating not to have that bi-weekly payment above my head anymore. I am now on to tackling my car payment and increasing my retirement savings.

2018 will be the year of becoming debt-free!