By Calum Ross & Andrew C. MacDonald
History always gives us perspective so let’s rewind to 1999. At that time, real estate investment deals wouldn’t be looked at until the underwriter at the lender received full documents upfront and 25% (or more) down payment was mandatory with bank lenders as CMHC only insured to 75% for even residential purchasers. Investors had to have liquid assets or net worth outside of their real estate holdings (often $50,000 per property), and be willing to pay a 0.25% to 0.5% interest rate premium for the additional risk a lender was taking on to finance a non-owner occupied property. Back then, there were lots of strong cash flowing properties in almost every market so not many people thought twice about buying their next rental. This model made a lot of sense to clients and lenders alike and then this thing called the subprime crisis happened in the US and it turned investment lending upside down in Canada as well. This soon created an unrealistic and unlikely to re-occur set of circumstances where investment lending guidelines became very lax.
As the US subprime crisis filtered its way through the global economic system, it became clear that Canada had to react to keep the unsecured and secured lending system here in Canada working. There was a large injection of liquidity into Canada to preserve the stability of our borrowing system and prevent a US style disaster. As an indirect consequence of this – for the first time in Canadian lending history - there was a big appetite for real estate investment mortgages. This was largely due to the simple fact that they could be insured and then moved off the lenders balance sheet – meaning they had little to no financial risk for any future default.
Now fast forward to 2015 and the market is in a very different place. Instead of the liquidity of the lending system being the point of concern, there is a growing concern that there is too much debt and access to liquidity as a result of consumers recklessly borrowing on credit cards, lines of credit, and home equity lines to finance consumption. Even someone with a very limited understanding of credit can see that real estate investment lending and mortgage lending as a whole is becoming increasingly difficult. Documentation required to get all types of mortgages today is scrutinized at a much greater level and many more documents are required.
As real estate investment borrowers, I think the time is long overdue for us to take a real look at the realities of today’s lending environment so we can better understand the growing aversion to real estate investment lending. We need to focus on how to make it more enjoyable and profitable for us to work with the lenders that we (both you and ourselves) so badly need to ensure the future of our real estate investment goals.
3 Keys to Ensure a Smooth Financing Process
To experienced investors it’s no secret that the amount of documentation required with each transaction only increases. Providing the documentation you need for your next mortgage can be stressful if you let it, or liberating if you choose to follow three simple rules to tame the paperwork monster.
Let’s face it, expecting to borrow hundreds of thousands of dollars without proper documentation is simply unrealistic. I mean really…..would you lend a quarter million ($250,000) or more of your money to a complete stranger without detailed paperwork? Any reasonable person would answer a resounding “No!” Put yourself into the lender’s shoes for a moment and you’ll quickly realize that most of what they’re asking for makes perfect sense. Then consider that real estate investment mortgages historically have a higher occurrence of fraud and a much higher default risk and it becomes very clear why lenders want a near perfect picture of each borrower’s situation before lending money.
Most people shy away from paperwork so the mortgage process may seem daunting, but the good news is that by understanding and following the three keys outlined here, you’ll ensure your mortgage process is both profitable and enjoyable for everyone involved. They are:
- Disclosure – Help us help you!
- Detail – Better to understate than overstate key details like income and assets
- Organization – If you can’t get documents in order during the borrowing process then it doesn’t help lender confidence.
Key #1: Disclosure
The first thing investors need to realize is that their mortgage professional should be playing on their team. An independent mortgage agent or broker has access to several different lenders, and will be able to help you take your deals to the right lenders to best realize your long term objectives. They’ll also be able to keep you from painting yourself into a proverbial corner with respect to your financing.
The mistake many investors make with regard to disclosure is that they withhold information because they think sharing certain details may jeopardize their deal. Instead, the opposite should be the case. Smart investors disclose all of their details to their mortgage professional and let them do their job in their area of expertise.
Keep in mind your mortgage professional gets paid to fund mortgages, not to talk about them or tell you all the reasons your deal won’t work. A competent mortgage professional will use the info you provide to help you select the best mortgage products and present your deals in the most positive light to lenders. The result of full disclosure is actually that you’ll hear “yes” more often.
Key #2: Detail
The second key is to remember that details matter in the mortgage process.
When you have plenty of verifiable income, extra down payment assets, and want to buy a primary residence that is well within your budget, a few approximations on details may fly. However, when it comes to building a portfolio of investment real estate, the details are critical – What are your exact figures for personal income, mortgage balances, mortgage payments, property taxes, condo fees, rents, etc.?
As you acquire more properties, details are more and more important. Your approvals from lenders are only worth the paper they’re written on if they are based on accurate details. Likewise, your mortgage professional can only provide you with great service and advice if they have complete and accurate details to work with (they need facts, not assumptions). The more times the mortgage professional or lender have to touch your file, the greater the chance something will go wrong.
The best way to take care of the details is to be organized. If you’re not clear on the details of your situation, how can you expect your mortgage professional, accountant or lawyer to give you the right advice?
Key #3 - Organization
Organization is the real make or break for those who are serious about real estate investing. It separates the sophisticated investors from the amateurs.
Being organized means:
- Having all of the documents that lenders may require accessible at the touch of a button and submitting requested documents all at once
- Using a consistent naming sequence to make life easy for yourself, your mortgage professional, and the lender
- Providing complete documents upfront (organized people don’t send documents in piecemeal fashion)
One of the most frustrating parts of the mortgage process for clients is running into the situation where they are tight for time on a deal and then trying to come up with documents at the last minute. Lenders tend to ask for the same types of documentation on most deals so being proactive does wonders to make the process more enjoyable for everyone.
Another proactive measure investors can take to really set themselves apart as sophisticated investors is to follow document-naming provisions and provide all documents in PDF format. A consistent naming sequence makes it easier for you as an investor to find your own documents down the road, easier for your mortgage professional to review those documents during the mortgage process, and easier for the underwriter at the lender to review and approve your file.
Finally, by providing complete documents upfront you’ll be able to avoid back-and-forth which is a major source of delay, frustration, and wasted effort for everyone in the mortgage process.
Walk a Mile in Someone Else’s Shoes
Remember that we’re all human and with multiple files on the go, the clients that are easy and profitable to deal with tend to get prioritized. This is basic human psychology.
For most mortgage professionals a primary residence purchase is simpler than an investor deal so guess which one they’d prefer to tackle? When a mortgage file gets to the underwriter at the lender who has to review the documents that same concept applies. When they have a choice between the first time buyer that requires the review of a total of 10 pages versus the real estate investor who requires close to 100 pages of document review, who do you think they’ll want to work on first? Consider that both parties may receive incentives based on the number and dollar volume of deals funded and you’ll quickly see the importance of making yourself stand out in a positive way to get your real estate investment mortgages approved and funded.
We’re all human, so what’s the solution? It’s simple. As a borrower make yourself easy and profitable to deal with by disclosing all of your info, providing complete details, and being well organized. Being nice to your friendly mortgage professional doesn’t hurt either.
Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He holds both a B.Comm and MBA in Finance and recently completed a comprehensive Leadership Program at Harvard Business School. Reach him at: www.calumross.com.
Andrew C. MacDonald holds an Honours BBA degree from Wilfrid Laurier University with a concentration in Finance and has been involved with the mortgage industry since his 3rd year of undergraduate studies. Being a REIN member and real estate investor himself, Andrew “gets it”. As the Manager of Mortgage Underwriting for Calum Ross Mortgage, he enjoys using the knowledge gained as a financial analyst and investor to help clients finance their own real estate portfolios.