With mortgage lending guidelines tightening 4 times over the past 5 years, it’s become evident that getting a mortgage is not as easy as it used to be. To ensure you can qualify under the new rules, at a minimum you need at downpayment, stable income and a satisfactory credit history and even that isn’t a guaranteed formula for financing approval.
Even if a borrower meets the minimum qualifying guidelines required to get approved, there are still some mistakes you can avoid in order to facilitate a favorable financing outcome. Below is a brief overview of a few of the most common things we see affecting a borrowers mortgage approval status.
1. Avoid excessive transferring between bank accounts
There are a few ways to obtain a downpayment in order to purchase your new home and this tip applies when you are saving up your own downpayment. Under the Canadian Anti-Money Laundering Act you are asked for confirmation the downpayment is from your own resources. To do that, you need to provide a 90 day history of the funds to show they have accumulated over that period of time or have simply been in your possession for at least that period of time and not just all deposited at once. Be aware if you are moving money around between various accounts, you will be asked for transaction histories from ALL of your accounts.
If you are unable to provide sufficient supporting documentation for any larger deposits, those funds MAY NOT be used towards your downpayment. If you are unsure, do disclose ALL details of where your downpayment is coming from to the mortgage professional prior to proceeding with your home purchase.
2. Over-estimating your income
One of the most important requirements of obtaining a mortgage approval is the qualifying income. Before you begin the process of applying for mortgage financing, make sure your mortgage professional is fully informed of exactly how you earn your income. This is especially important when you are self-employed, paid bonuses or overtime, on contract or paid by commission. This will ensure your personal information is accurate from the get-go and there will be no unpleasant news after you believed your mortgage would be approved.
3. Not knowing your credit score
Given we have already covered downpayment and income guidelines, it is now time to review the credit requirement as it is equally as important in determining whether you can qualify for the financing at this time. With credit, what you don’t know CAN hurt you! Being aware of what is on your credit report before you begin the mortgage application process will enable you to correct any inaccuracies as well as to provide accurate explanations for any credit issues you have experienced in the past. And if your credit is good, you have peace of mind knowing you can request the most competitive interest rate.
4. Budget breakers
Avoid looking at property that is simply out of your price range by getting a pre-approval. A pre-approved mortgage will not only rate protect you for up to 4 months, it will direct you on what is an acceptable price range to shop in.
5. Low appraisal value
An appraisal may be required when you are purchasing a home or considering a mortgage refinance. An appraisal confirms the value of the home by comparing it to recently sold similar homes in the area. If the appraised value does not support the purchase price or estimated value of the home, your mortgage approval could be withdrawn or in the case of a purchase, if you still want to proceed, a larger downpayment may be required if the seller is not prepared to negotiate. If you do have any questions or concerns about the value of the subject home prior to proceeding with financing, talk to your mortgage professional about an automatic evaluation in lieu of an appraisal.
6. Tight timelines
A mortgage, like home buying is a process and should not be rushed. This is a big commitment that is going to impact the lifestyle you lead and you should avoid getting pressured into making quick decisions without being fully aware of all the financing options available these days. In order to not jeopardize your physical health and well being with unneeded stress, we suggest you have ample time to remove financing conditions for a new home purchase if at all possible ; and given there are a lot of other parties involved in the mortgage registration process it is also advisable to set a reasonable closing date to ensure you can actually close on the possession date.
7. Late to prepare your paperwork
Sometimes issues come up during the mortgage process that can’t be avoided; though most often can be dealt with. The key is to be as prepared as you can and in order to do that, you must have an open and active dialogue going with the mortgage professional throughout the entire process. After the initial “conditional” mortgage approval is received from the lender, you will be provided with a list of what documentation is required in order to satisfy those “conditions”. The list will include confirmation of income and downpayment among other things depending on your individual finances. It’s a good idea to have as much paperwork ready as possible ahead of time that can be reviewed by your mortgage professional prior to you putting in an offer.
8. Limiting your options
When you have less than a 20% downpayment, you as well as the property have to be approved by both the lender and the default insurance company. This insurance covers the lender in the event the borrower defaults and the premium for the insurance is passed onto the borrower and added to the mortgage amount. The cost does decrease as the downpayment amount is increased. There are presently 3 insurance companies operating in Canada, however, majority of the lenders only deal with 1 or 2 of the three. Increase your odds of approval by working with a mortgage professional and lender who have access to all three insurance companies instead of limiting your selection by a third.
Getting approved for a mortgage can be quite stressful, however, educating yourself on the mortgage process and knowing what to expect can prepare you for any situation that arises. I hope this article will act as a prevention checklist for you to ensure your bases are covered and set up for a home run. As always, I recommend you contact your favorite mortgage professional to ask any specific questions you may have about your own mortgage options in order to ensure you’re getting accurate information that applies to you.