A mortgage pre-approval shows you, the homebuyer, what value of home you can afford, and the mortgage payments associated with various purchase prices. It also guarantees a mortgage rate for a period of time; therefore, protecting you against potential rate increases. You are not obligated to the bank or mortgage broker to whom you received your mortgage pre-approval, and there is no cost. So, there is no downside to obtaining a pre-approval through a mortgage broker.
Home Buying Process
Once you have found a home that you would like to put an offer on, you will put this offer in writing in a document called an ‘offer to purchase.’ Your real estate agent will help you put the offer together. This offer should include the following details:
- Your name, the name of the vendor and the address of the property
- The purchase price offered
- The chattels that will be included in the purchase price (for example, window coverings, appliances, etc.).
- Whatever items in or around the home that you think are included in the sale should be stated in your offer
- The deposit amount
- The closing day (the date you take possession of the home), which is usually 30 to 90 days from the date of agreement. As of the closing date, the purchaser is responsible for taxes, utilities, repairs and maintenance
- Request for a current land survey of the property
- Date when the offer becomes null and void — that is, when it expires
- Financing Condition: a condition which allows the homebuyer to secure financing (i.e. mortgage approval) before the sale is final. If you cannot secure financing, then you can still walk away from the deal and recover your full deposit. Typically, you should ask for 7-10 days to secure financing
- Home inspection a condition which allows the homebuyer to have the house looked at by a professional inspector prior to making the sale final. If the inspection uncovers something you do not like, then you can still walk away from the deal and recover your full deposit
This process may occur several times over: it is not uncommon to make an offer, receive a counter-offer, and then make revisions.
A mortgage approval is similar to a pre-approval, but it contains all of the specific details of the house you want to purchase. The mortgage approval will have the full address, exact purchase price, closing date, property taxes, etc. These are details which are not in the mortgage pre-approval. Once your mortgage provider has all of these details, they will give a mortgage approval as long as they are comfortable with the property you are purchasing and your qualifying criteria are in line. Once you have a mortgage approval that you are satisfied with, you can waive your financing condition and finalize the sale.
When your offer on a home or condo is accepted, you might be surprised when your real estate agent asks you to include a small deposit with it. Not to be confused with your down payment, a deposit is essentially an offer of good faith to the seller that you are serious about purchasing their home – even though you still want to get a home inspection and your mortgage financing in place, before signing on the dotted line.
Once you sign the accepted offer, the deposit is applied against the purchase price of the home – so it’s not technically an “extra cost”, but it’s still a part of your home buying budget and experience. How much should your deposit be and where does it go when you make it? Let’s take a look.
How much is a typical deposit?
There isn’t really a set amount, but your real estate agent may request something in the range of 1% of the purchase price. For example, if you bought a home for $300,000, your agent could request $3,000 for the deposit. Normally to show the seller you are serious it is a minimum of $1000-$3000.
When do I pay the deposit?
The deposit is paid when you sign an accepted Offer to Purchase (meaning the seller has accepted your offer and wants to move forward), but before your home inspection and mortgage financing are done.
Who do I give the deposit to and where does it go?
You’ll give your deposit to your real estate agent, when you’re signing the paperwork for your accepted offer. Your agent then passes it off to the seller’s real estate agent, who it stays with until closing day. On closing day, the amount is applied against the purchase price (so it’s essentially considered part of your down payment).
What happens if the house doesn’t close?
If you back out of the purchase for any reason other than a condition that is noted on the Offer to Purchase, the seller may be able to keep your deposit. Remember, at this point, they’ve stopped accepting offers from other people. In the time it took for you to decide not to go through with your offer, they may have missed out on other ones. If you’re handing over between 1% and 3% of the purchase price of a home upfront, you want to be certain it’s for the right home for you; losing that amount of cash could take a serious bite out of your home buying budget, and set you back for months. I don’t want this to scare you – I just want you to be conscious of how big this decision is, so you can protect yourself (and your savings). In a market with multiple offers such as the current Barrie market where homes are being sold above list price, typically the higher the deposit the more seriously your offer is taken from the seller’s point of view.
Mortgage Approval Process
Getting approved for a mortgage through a mortgage broker could be the most important step in the home buying process. If you weren’t already pre-approved which you definitely should be, you’ll begin your mortgage approval process after you’ve made your Offer to Purchase and your offer has been accepted. Your Offer to Purchase will be conditional on financing, which means you need to secure your mortgage approval before you can move forward with your home purchase.
The mortgage approval process is similar to a mortgage pre-approval: you’ll need to provide your mortgage broker or lender with specific details about the home you’re purchasing, along with your income and down payment details.
Some of the documents you may need to provide include:
- Current employment income from a T4, pay slips and signed letter from your employer
- Other sources of income such as investments, rental income, or freelance income
Details about the home:
- The address
- The closing date
- Property tax, condo fees and heating cost estimates
- A copy of the real estate listing
- A copy of the accepted Offer to Purchase agreement, including the exact purchase price
- A copy of the home appraisal, home inspection and/or land survey
- Your lawyer’s name, address and phone number
Down payment information:
- If you are using your own funds: savings or investment statements from the last 90 days
- If you are using the Home Buyers’ Plan (HBP): proof of withdrawal from your RRSP
- If you are using a gift from a family member: a letter stating the money is not a loan
- The deposit amount that was included with your Offer to Purchase
- An inventory of your current assets and liabilities such as investments or car loans
- A void cheque to setup mortgage payment withdrawals
Once your broker or lender has all of these details, they’ll send the application to an underwriter at the financial institution you’re asking for a loan from. The lender will use debt service ratios to determine if your application fits within their guidelines. If the lender is satisfied that both your finances and the property fit within their qualifying guidelines, they’ll approve you for the mortgage. The typical turn-around for a mortgage approval is 24-48 hours.
Mortgage Application Rejection
If your mortgage application is not approved, there are several steps you can take.
- You could get a guarantor to co-sign the mortgage application. This is often done by a parent or relative.
- You could seek an alternative mortgage lending institution or private lender. There is a whole segment of the industry that deals specifically with “credit challenged” client profiles. These companies specialize in lending to homebuyers who cannot obtain a mortgage through a traditional lender like a bank, credit union, but lender/brokerage fees will apply for any alternative lending deal. This is not the mortgage brokers fault rather the increased risk of using a subprime lender means they want to be paid extra to lend you their money. The mortgage brokers role at this point is to obtain funding for the short term and put a long term plan together so that down the road, a prime lender will be able to be used once proper credit conditions are restored.
A Mortgage Broker’s Job
A mortgage brokers job is to work with you and represent the client to each and every lending institution to find the best possible match for the client giving all the circumstances. Every client will have different job history, credit, down payment amount and will be looking at a different qualifying property. Each of these things will play a determining role in which lender the mortgage broker will use to secure funding. Your mortgage broker will ALWAYS be your best bet and will help you secure funding through the cheapest lender possible.