Concern No.1: Will the sub prime mortgage situation in the U.S.A. affect Ontario homebuyers?
Let me first provide the definition of sub prime and then some background information on subprime lending.
Definition of subprime: Fannie Mae** has lending guidelines for what it considers to be "prime" borrowers on conforming mortgage loans - those loans they will buy or securitize into the credit market. Their standard provides a good comparison between those who are eligible for prime vs. subprime loans. Eligible borrowers for prime loans have a credit score above 620 (credit scores are between 350 and 850 with a median in the U.S. of 678 and a mean of 723), a debt-to-income ratio (DTI) no greater than 75% (meaning that no more than 55% of net income pays for housing and other debt), and a combined loan to value ratio of 90%, meaning that the borrower is paying a 10% downpayment.
Subprime lending (also known as B-paper, near-prime, or second chance lending) is lending at a higher rate than the prime rate. In the US, the term "subprime" in mortgage lending, refers to loans that do not meet Fannie Mae** or Freddie Mac guidelines. While often defined or defended as lending to borrowers with compromised credit histories, the Wall Street Journal reported in 2006, 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans. It may or may not reflect credit status of the borrower as being less than ideal and may not even reflect the interest rate on the loan itself. The phrase also refers to bank loans taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and to certain types of self-employed persons.
Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, allegedly poor credit histories (which can be extraordinarily inaccurate) and potentially adverse financial situations that are sometimes associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the perceived increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards. The most abusive subprime lending practices are, arguably, short-term "payday" loans.
Subprime lending is highly controversial. Opponents alleged subprime lenders engaged in predatory lending practices such as deliberately targeting borrowers who could not understand what they were signing, or lending to people who could never meet the terms of their loans. Many of these loans included exorbitant fees and hidden terms and conditions, and they frequently lead to default, seizure of collateral, and foreclosure.
There have been charges of mortgage discrimination on the basis of race. Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.
As the result of an ongoing lending and credit crisis in the subprime industry, and in the greater financial markets which began in the United States, the controversy surrounding subprime lending has expanded. This phenomenon has been described as a financial contagion which has led to a restriction on the availability of credit in world financial markets. Millions of borrowers are making inflated payments and cutting back on other parts of their budget. Hundreds of thousands of borrowers have been forced to default or file for bankruptcy. Hundreds of subprime lenders or brokers have closed, some have filed for bankruptcy and several have been acquired.
**The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a government sponsored enterprise (GSE) of the United States government. As a GSE, it is a shareholder-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the U.S. government, nor do the securities it issues benefit from any explicit government guarantee or protection. This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name "Fannie Mae" is a creative acronym of the company's full name that has been adopted officially for ease of identification.
The above information has been taken from http://en.wikipedia.org/wiki/Subprime_lending
Concern No.2: If one has been renting for more than two years, is it advisable to continue renting in the GTA due to the situation in the U.S.A.?
If you have been renting for more than one to two years and have been paying between $1000 and $1200 per month in rent, then buying a home (condo apartment, freehold townhome, freehold townhouse, semi detached house, detached home, etc.) according to your financial situation, does make sense as per the following example:
If you are paying a rent of $1200 per month today, you are loosing approx. $307 per month over a five year spread. [Based on an example of a $170,000 worth 2 bedroom, condo apt. with 5% down payment, monthly mortgage of $989 (@5.25% rate) gives you a mortgage balance of $147,930 after five years, thus arriving at a saving/equity of $307 per month]. At the end of ten years you have equity of $42,576 on the home you own. If you pay rent for ten years, you have zero equity.
Similarly last year, when the rate was approx. 4.45% you would have earned equity of approx. $338 per month in five years if you had bought a condo then.
If you need a FREE of cost, No Obligation, one-on-one discussion of your personal home buying situation and want to find out whether you could safely qualify for a mortgage or afford to buy a home, please contact me.
