I trust that our episode this week will warn you, the Consumer, to be wary of those pre-approved mortgages offered by a multitude of Lenders. I am certainly in favour of interviewing potential home buyers to indoctrinate them into qualification standards, maximum house prices for their incomes, and holding their interest rate for up to 90 days so they can go shopping for a home. Most Lenders offer a certificate which would give the impression to most people that indeed they are approved for a mortgage. Read the fine print!

This week John and Alice came to see me in a panic for a mortgage. A certain bank had given them such a pre-approval for a purchase up to $148,000 with 5% as a downpayment. The certificate did say that it was conditional on proving income and downpayment, and it also said that it was conditional on CMHC's approval. It guaranteed them a rate of 7.95% for a five year term.

They found their dream home in Greely, priced at $145,000. They had $22,000 (gift from her father) in cash with which they would give $8,000 as downpayment, they would payoff their $11,000 car loan ($355 per month) and still have $3,000 for closing costs and moving expenses. They were ecstatic.

John has worked as a full time draftsman for eight years at $40,000 per year. Alice, as a secretary, gets paid $10 per hour ($20,000 per year) working for a trucking company. She has only been there 7 months, after staying home for 8 years taking care of children. Her job is described as "probationary" for the first 12 months. Therein lay the problem. Their banker said that due to her job being temporary, they had to qualify on John's income alone...he did not qualify!

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John & Alice had forewarned their banker of that potential problem, but he said not to worry about it. Now he tells them that he could not get it passed his head office or CMHC.

They had put down a $5000 deposit with the offer and since they had the pre-approval, did not think they had to make their offer conditional on financing. Now they risk losing their $5000, lose the rate of interest (7.95%), and possibly their chance of buying in the foreseeable future. What were they to do?

We were able to get a letter from her boss indicating that if the job would continue at the end of the probation period, that she was assured of continued employment. Her skills were not being challenged. He would issue a strong letter of recommendation if the job was declared redundant. With that in hand, we were able to obtain a first mortgage for $111,000 (75% financing) with a one year term at 7.95%. We also spoke to her father, who issued the downpayment, and asked him to guarantee a second mortgage of $26,000 for a period of one year...he agreed. They can now buy their home. In one year, when her job is no longer in question, we can apply to a new first mortgage lender, who will be able to present an application to CMHC to put both mortgages together using the "family" income for qualification. We are still hoping that interest rates next year do not exceed 8%.

This whole problem was created by an overzealous banker telling them not to worry, and he issuing a certificate that would convince most people that they were indeed approved. With 95% financing, one should always put in a financing clause in the offer.