We have entered another year together. This scribe's mandate is to educate the Consumer on his/her options during mortgage negotiations, for a purchase or refinance of a property. My intent is not to defame the traditional lending institutions, but rather to help in situations that are the exception rather than the rule. In order to properly explain the process, one must start at the beginning. Some of you may find this article to be old news, but please remember when it was your first kick at the cat.

There are some new changes to the rules governing high ratio financing (beyond 75% financing). Last year, only first-time buyers were allowed to purchase with only 5% down. Today, there are no longer any restrictions as to who can buy with 5% down. The rules still maintain that any normal financing beyond 75% of the value (or purchase price) must be insured against default through either Canada Mortgage & Housing Corp (CMHC) or G.E. Capital Corp. (GEC). There once was a limit on the amount CMHC would insure, those restrictions have also been removed. The process for applying for a mortgage can be done in two distinctive manners. One is called a "pre-approval", and the other an "application for approval".

The pre-approval relates to getting to a lender who will take for granted that the information you are providing is true, while the application for approval relates to proving the information. I have had the dubious honour of picking up the pieces after several clients offered to buy houses with "pre-approvals" in hand, only to be told by the lender after the offer had been accepted that the loan appplication was rejected. DO NOT TRUST A PRE-APPROVAL!

The pre-approval process is flawed to the extent that the piece of paper the lender has granted you (the certificate) may give you the impression that your mortgage is automatically approved. That is not the case. No matter how confident you may be that your mortgage will approved, always put in a clause in your offer to purchase demanding at least 5 working days to confirm your suspicions that your mortgage will be approved. It is far easier for you to waive the financinbg condition than it is for you to hope the Vendor will understand that you can't get a mortgage, should that event happen. The pre-approval is simply a tool the lending institutions use to add you to their list of potential clients. The certificate itself does count for something, it will reserve money for you at a certain rate for a certain number of days, while you go shopping. Some lending institutions will guarantee the rate for up to 4 months. If the market rates go higher but you buy within the initial time frame, the lod rate will be yours (provided you qualify). If the rates happen to go down during your shopping frenzy, you will be given the lower rate, in most instances. You should get only one pre-approval! If you should happen to go shopping to various lending institutions, each one will do a credit check on you. The more credit checks on you credit bureau report, the lower you will score. The easiest way to get multiple pre-approvals without lowering credit scoring is to shop through a mortgage broker. Most lending institutions will accept the broler's credit report without doing one of their own.
 

The application for approval happens when you convert you pre-approval certificate or when you actually apply for a mortgage. Usually by this time you have already chosen a house, and the offer to buy has already been accepted by you and the Vendor. The lending institution will ask you to bring in:

1) a copy of the accepted offer,

2) a copy of the real estate listing (if it was listed for sale, if not then a fact sheet and a picture will be necessary),

3) a completed and signed mortgage application,

4) verification of your down payment ( by way of bank books or bank statements, copy of latest RRSP statement, copy of a gift letter and copy of gift cheque, etc),

5) verification of your income by way of letter from your employer and a recent pay stub (if you are commissioned or self-employed, proof of income is by showing your last two or three Revenue Canada "Notice of Assessments"),

6) any other pertinent proof the lender may require (ie. Bankruptcy Discharge, explanation for derogatory credit, proof of payment of collections or judgements).
 

Once the mortgage has been approved, you will be issued a "Mortgage Commitment", which you will be asked to accept or reject. If the mortgage commitment is subject to anything (appraisal, zoning, etc.) do not waive your financing condition, until all conditions have been met.

Next week we'll look at new rules for qualifying for that mortgage.