Mortgage Approval Denied? What Not to do Before You Buy a Home.
Author: Tracy Ruddell
Mortgage pre-qualification is a necessity in today’s market for anyone starting to look at homes for sale in Toronto. Last week, we talked about mortgage pre-approval–what it is and what it is not–and that we recommend that buyers get fully pre-qualified in advance of house hunting. Today, we want to take you through what not to do after you’ve received pre-qualification.
These tips are particularly important if you're a first-time buyer, never having been through the home buying process before, to ensure that you receive final mortgage approval after you've made an offer on a home, allowing you to close.
That's right. While it doesn’t happen often, it is possible to be denied a mortgage even when you have a pre-qualification letter from a lender. And let's face it, a lot of things that didn’t use to “happen often” are happening more often under these crazy market conditions. You need to be aware of the risks involved with mortgage loans to avoid the pitfalls and ensure your home purchase process is smooth.
Pre-qualification is not a guarantee although it is a strong indication that you will be approved and for how much. That pre-qualification is based on the assumption that all things surrounding your financial profile remain the same between the time you applied for pre-qualification and the time you apply to lock-in your actual, final mortgage. It also assumes that the rules around mortgages in Canada haven’t changed in the meantime, as they did last fall, although there is usually a lengthy transition period for such things; see our post on new Canadian mortgage rules.
To ensure you get final approval and are able to close on your home, you want to avoid doing anything that will negatively impact your credit profile. Specifically:
Avoid taking out any other forms of debt including applying for new credit cards, taking out any other loans or lines or credit and/or leasing a car or any other major item
Ensure you never miss a payment on any existing loans (e.g. credit cards or student loan), your current property (whether it be a rent for a rental payment or a mortgage payment and property tax if you're already a home owner) or any other bills including but not limited to utilities, phone and internet
Avoid making any large purchases on credit such as leasing a car or purchasing major furnishings for your new home on a credit card
Don’t switch jobs in the interim period if it can be avoided. Any change in employment can be considered a new risk by lenders, even if the job is a promotion with an increase in pay. They look at things like being under a new probationary period as added risk.
Any of the above could change your risk rating in the eyes of your lender.
Also, you want to make sure that your mortgage pre-qualification hasn’t expired. Your letter will note your approval period which is often 90 or 120 days. In this hot market, it can take longer than that to close on a home; it could take you 6 months or even a year to find a home you like enough to offer on in this listings shortage we’re operating in. Plus, many sellers are asking for longer-than-typical closing periods to allow them time to find their next home.
With that in mind, you must keep track of your pre-qualification timeline. If your pre-qualification is nearing its expiration date, contact your lender for an extension. Don’t let it expire before your offer date.
Tell your lender or mortgage broker where your down payment is coming from. Don’t wait until you’ve offered on a home to do this; disclose your deposit and down payment source(s) at the time of your initial, pre-qualification application.
Why? Because if the source if from anything other than your personal savings, you may not be able to use it as part of your down payment.
If You’re Buying on Credit, Disclose the Source From the Get Go
If you’re banking on using a loan or line of credit as part or all of your down payment, you need to inform your lender before you make an offer on a home as they may not accept it.
It used to be much easier to draw on an existing line of credit for part of your down payment. Now, many lenders won't accept lines of credit as a source of down payment funds, even when this line of credit is with a different lender and doesn’t impact them directly. It’s because any additional debt makes you a greater risk in the eyes of the lender – that’s one more monthly payment you need to make which may leverage you above the monthly debt load that they consider to be acceptable.
The golden rule to remember when applying for a mortgage is that it’s not your equity that makes you either an attractive or an unattractive client to lenders – it’s your ability to make the monthly payments and so all of your other required, minimum monthly debt payments get factored into that equation when they’re conducting a financial stress test. What you don’t want to happen is to wait until closing day when the source of your down payment funds has to be declared, only to find out it’s unacceptable and you’re denied a mortgage.
And this isn't something you can hide. With the Federal Government getting more involved in the Real Estate industry, tracking data to crack down on money laundering and collecting data on foreign buyers, you can’t get away with hiding the source of your money even when that source is legitimate. Don’t assume your clean money is an acceptable down payment if it comes from any source other than your own, personal savings.
Know That If You’re Planning on Borrowing Money from Friends or Family, You May be Denied
It’s one of those weird Real Estate finance rules that, to be honest, is probably archaic and holding a lot of first-time buyers back in this economy. Many lenders will not allow you to borrow money from family for a down payment as - as per the above - it’s seen as more debt that you need to pay back. You can, however, be gifted money but only from a direct family member – either one or both of your parents or a sibling - but note that lenders may not accept gifted money by a relative further removed.
Cases like this are happening much more often than in decades past because of how expensive GTA Real Estate has gotten. Many buyers are relying on a loan or living inheritance in order to get a foot on the property ladder as they can’t out-earn/out-save the market on their own.
The short of it is – be honest about where your money is coming from to avoid any potential pitfalls and ensure a smooth closing.
If You’re Accessing Your RRSPs, Ensure You Understand the Process
Many first-time buyers take advantage of the government-led Home Buyers Plan (HBP) that allows them to draw up to 25% of their home purchase from their RRSPs, providing they pay that amount back over the next 10 years. Most lenders are well-versed in the HBP and can walk you through the process in detail. If you plan on accessing your RRSPs, let your lender or broker know at your first meeting and ask them to take you through the process so that you’re prepared well in advance of closing.
Your down payment must be in a cashable form and quickly accessible. If, for example, you have cashable GIC’s as your intended down payment but you can’t access them for three months (i.e. they have a 90-day term), you don’t want to be making an offer on a property with a 60-day closing (unless you can negotiate a longer close with the seller, that is).
Likewise, your deposit has to be immediately accessible as you will need to bring in a bank draft or a certified cheque typically within 24 hours of your offer being accepted. In fact, a lot of sellers will ask for the cheque or bank draft to be supplied with your offer on offer night and not having your funds readily accessible could lose you the bid.
Have you–or, for our REALTOR® readers, any of your clients–had any horror stories when it comes to mortgage approval? Share your stories below (avoid personal details) so that more buyers can be prepared and don’t end up with horror stories of their own.
If you've already bought a property and find yourself in danger of not closing due to mortgage denial, reach out to James Harrison, President of mortgages.ca, who assisted us with this mortgage approval blog series. James has become known for his ability to find a mortgage solution stat for buyers who find themselves in a hot water close to closing. You can contact James here.
Lead image: © Stuart Miles from Shutterstock.