Today we are continuing our look at how to flip a house in Calgary. I’ve invited Kathy Fleshman, RBC Mobile Mortgage Specialist, to write a guest blog for the vanderveenteam.com. Below you will find some of her solutions for the first steps in looking at financing your flip in Calgary. Of course every situation is always different, and the best first step is to phone your mortgage broker so you can create your own financing solution which is tailored to your individual needs. For mortgage advice on any home purchase, Kathy Fleshman is always a great call to make! And now, here's Kathy!
When looking to finance the purchase of a home you intend to flip, there will be some differences in the mortgage financing you apply for. When a property is not going to be owner occupied and is being purchased for either rental income or resale profit it is deemed to be an investment property. While many of the standard qualification criteria will be the same (for example standard debt service ratios, confirmation of income, and down payment documentation, as well as credit bureau requirements) some aspects will be different.
One key thing to know is that the minimum down payment required will be 20 to 25% of the purchase price, which in most cases must be from your own resources (i.e. savings, investments, equity). These types of mortgages are not done by all lenders. They do pose a higher risk---being only short term with intent for profit---than a mortgage done for a property intended to be kept long term as a primary residence or rental. Some clients may wish to take the title of the investment property in the name of a personal holding company, and this may be permitted if the holding company meets certain criteria to do so, but in most cases the owners of the company must qualify personally and sign the mortgage as a guarantor or borrower.
The maximum amortization for your investment property will be 25 years and in most cases an open mortgage (short term, i.e. one year) would be recommended as they provide the most flexibility for these types of transactions. Rates may be slightly higher on these short term open mortgages than some other types available, but they are generally the best option to avoid reducing your sale proceeds with penalties.
For most lenders, investment properties will require a full appraisal. Generally the lender will choose the appraiser and the cost will be to the client. Many lenders will also have a fee (i.e. 2%) for the financing as it is perceived to be a higher risk transaction and the mortgages are sometimes funded through private lenders. Another important piece of information is that the lending will in most cases be based on the lower of the appraised value or purchase price. So, if the property appraises lower than the purchase price agreed upon in the purchase agreement, the appraisal value will be used to determine the amount that can be financed which could increase down payment requirements if the purchase price is not reduced accordingly.
Another option, should you have sufficient equity in an existing property would be to use that property to finance the purchase. For, example, an RBC Homeline Plan can be done on a primary residence or investment property, and if set up properly could be repaid with sale proceeds without any penalty once your flip sells and remain in place to be used for your next project.
When financing a flip there are many factors to consider including the property type, value, number of units per building, qualification criteria, etc., so the best starting point is to speak to a mortgage professional. Just as you would for a normal primary residence purchase, you can have a pre-qualification or pre-approval done prior to starting your search for a property. The right mortgage starts with the right advice.
Make sure you read our entire series on How to Flip a House in Calgary. Let me know if you have questions - I'd love to know how your "flip" turned out.
The Vanderveen Team
Maxwell South Star Realty
Phone: 403.253.5678 Fax: 403.592.6736