Financial Nuggets – April 19, 2017

What You Should Know About Home Appraisals

When you’re buying a home using a mortgage, refinancing your existing mortgage, or selling your home to anyone other than an all-cash buyer, the home appraisal is a key component of the transaction. Whether you’re a buyer, owner or seller, you’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.

What Is a Home Appraisal?
An appraisal is an unbiased professional opinion of a home’s value. Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.

Lenders want to make sure that homeowners are not overborrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will recoup the money it lent by selling the home. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.

The Appraisal Process and How Appraisal Values Are Determined
Because the appraisal primarily protects the lender’s interests, the lender will usually order the appraisal. A property’s appraisal value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in assessing the home’s value. The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needed repairs.

Appraisers are required to report on their descriptions of the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on his or her observations. An appraisal costs several hundred dollars, and generally, the borrower pays this fee.

What Homebuyers Need to Know
When you’re buying a home, and you’re under contract, the appraisal will be one of the first steps in the closing process. If the appraisal comes in at or above the contract price, the transaction proceeds as planned. If the appraisal comes in below the contract price, however, it can delay or derail the transaction.

Chances are neither you nor the seller wants the transaction to fall through. As the buyer, you have an advantage in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price so the transaction can move forward. The bank won’t lend you or any other prospective buyer more than the home is worth.

What Home Sellers Need to Know
As a seller, a low appraisal, if accurate, means you will have to lower your home’s price to get it sold. Lenders won’t approve loans for more than a home is worth, and holding out for an all-cash buyer who doesn’t require an appraisal as a condition of completing the transaction is unlikely to net you a higher sales price. No one wants to overpay for a home.

The Bottom Line
When everything goes smoothly, the home appraisal is just another box to tick on a loan-closing checklist. When the appraisal value is lower than expected, the transaction can be delayed or even canceled. Regardless of which situation you encounter in your home buying, selling or refinancing experience, a basic understanding of how the appraisal process functions can only work in your favor.

How Is Your Credit Limit Affecting Your Credit Score?

While it may not appear to be the most obvious factor affecting you credit-score, it’s important to understand how your credit limit impacts your rating.

What is your credit limit?
The credit limit on any account is the maximum amount you can borrow.

If you use all of the credit available to you through that account, you must pay down the loan in order to draw more money from it.

Commonly, it is assumed that the “payment history” portion of your credit report is what determines the quality of your rating, however, this overlooks the second most important category: “amounts owed”.

The “amounts owed” category is responsible for 30% of your rating. This means that the more you borrow, the higher risk you become.

Imagine you have a credit limit of $1000. If you use $1000 of your credit, it appears that you are using more credit than you have physical cash. If you use only 30-35% of your limit ($350), lenders will see that you use your credit responsibly, and can afford to pay back what you borrow.

It’s important to keep the ratio of borrowed credit to available credit as low as possible.

“That’s not a problem for me, because I always pay off my balance in full.”
That’s great! However, this practice won’t always protect you from a low rating.

Sometimes, the lenders might report what your “amount owing” is to the credit bureau before your full payment is received. When this happens, the computer only detects your debt, without recognizing that the balance has been paid – thus spitting out a lower score.

Tip: If you’re in the habit of primarily using your credit card for purchases and paying it off at the end of the month, try making more frequent payments throughout the month to keep the balance low, or request a credit increase to keep the ratio of borrowed to available credit, low.

Just remember, how you use you credit limit will be reflected in your credit score!

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Homeowners Pondering Future Plans As Toronto Real Estate Values Skyrocket

Sell high, to buy low or just stay put? That’s the deliberation many Ontario home owners must now be making as the Province’s Real Estate values, especially within the GTA, continue to skyrocket. According to a most recent Toronto Star report, the number of Canadian home sales hit a record high last month with the sizzling Toronto-area market pulling up the rest of the country, as indicated by the Canadian Real Estate Association (CREA).

“Toronto always swings the biggest bat in Canada, but even more so lately,” said CREA senior economist Shawn Cathcart on April 18.

Non-seasonally adjusted Canadian sales were up 6.6 per cent year over year in March, with Toronto climbing 17 per cent in that period.

That offset a 31.5 per cent decline in Vancouver sales, the latest drop since the introduction of a foreign investor tax and vacant homes taxes last year.

The monthly CREA statistics came On April 18 as the provincial and federal finance ministers and Toronto Mayor John Tory met to discuss the imposition of potentially using similar taxes to cool Toronto’s increasingly unaffordable property market.

CREA cautioned politicians, however, against destabilizing other Canadian markets in any attempt to temper Toronto prices.

“If Toronto is the only hot market in Canada, you don’t want to be throwing cold water on everybody,” said Cathcart.

He said the city’s “prices are as tight as they’ve ever been.”

“There’s a lot of interest for every listing that comes on and that’s all the way out basically in 200 kilometres in any direction from downtown Toronto at the moment.”

Cathcart noted that Toronto’s real estate trends now encompass the entire Greater Golden Horseshoe.

“So instead of being 20 per cent of Canada, we’re actually looking at a third of Canada that’s seeing these kinds of trends,” he said.

The average Canadian sale price increased 8.2 per cent year-over-year in March with a 9.3 per cent decline in Greater Vancouver and 33.2 per cent increase in the Toronto area, according to CREA.

“If you take the GTA or Greater Golden Horseshoe out of the numbers, the average price in the rest of Canada is actually down on a year-over-year basis,” he said.
The association said home sales over its Multiple Listings Service system increased by 1.1 per cent in March to top the previous monthly record set in April 2016. On a seasonally adjusted basis, sales totalled 46,353, up from 45,856 in February.

The actual national average price for homes sold in March this year was $548,517, up 8.2 per cent from a year ago. Excluding the Toronto and Vancouver areas, the average price was $389,726