From filling in the paperwork, to signing on the dotted line.
There are various steps that have to happen before you’ll be awarded a mortgage loan for a home purchase:
Choosing a potential lender
Using a mortgage broker/agent
If you are using a mortgage broker/agent and when they know all they need to know about you and your needs, they’ll start to consider which mortgage might be a good fit for you. They’ll think about whether you meet various lenders’ qualification requirements.
The mortgage broker/agent will provide you with options based on an assessment of the lender, the mortgage, its structure, its features and its risks in light of the information you have provided about your circumstances. The mortgage broker/agent must also explain his or her rationale for the options that have been identified.
Make sure the mortgage broker/agent provides you with information that will help you determine whether you can afford the mortgage, including an estimate of the total cost of borrowing for the term of the mortgage. The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period”. The total cost can be much more than the amount you are borrowing. You need to determine if the rate, amortization period and total cost of the mortgage are right for you.
Review the Working with a Mortgage Professional – Checklist for more helpful tips.
Going direct to a lender or through other channels
Make sure you shop around to find a mortgage at a rate and for a term that is affordable for you, and with conditions with which you can live. If you are using a private lender, lending their own money on the security, make sure that they are either licensed if doing business as a mortgage lender, or otherwise are using a licensed Mortgage Brokerage. Read this Shop Around for a Mortgage - Checklist for tips on how to find a mortgage that best suits your needs.
Want to be Pre-Approved?
It is a good idea to get pre-approved for a mortgage before you start your search for a new home as it might help you keep a budget range in mind. You can ask a mortgage broker/agent to help you with this process, or go straight to a financial institution or other lender
You’ll receive written confirmation for a certain amount at a particular interest rate and the offer will be good for a specified amount of time. Keep in mind however that a pre-approved mortgage is not a guarantee of being approved for the mortgage loan, as that depends on a number of things including the property you want to purchase.
Meeting and Information Download
Your mortgage broker/agent or your lender will ask you for information to help them better understand you, your goals for the mortgage loan, and the type of mortgage you want or need including:
- Your financial circumstances
- Your assets
- Your sources of income and/or funds, including employment
- Your mortgage needs and objectives
- Your knowledge of mortgages
- Your preference in terms of amount, rate, term, amortization and conditions
- Your risk tolerance
- Other parties to the transaction
- If you have identified a property you wish to purchase, information about the property that will become the security for the mortgage loan
- If you know what your credit rating is
- Your debt load or liabilities
- The amount of down payment you have saved
They will also ask for documentation to confirm the information you provide.
Take the following information with you to your first meeting with a mortgage broker/agent or lender:
- Information about your employment including confirmation of salary. A letter from your employer will be suitable for this
- Information about any other sources of income you have and evidence
- Details regarding where you bank
- Proof of any assets including RRSPs or a savings account
- Details of any loans or other debts such as student loans
- Evidence of your down payment including information about the amount of down payment you have saved and where it’s coming from
- The full address of the property
- A copy of the real estate listing, if applicable
- Your mortgage pre-approval certificate, if one was issued and you have now identified a property
- Contact information for your lawyer or notary
- A copy of the agreement of purchase and sale
- Estimates of your monthly housing costs (e.g., property taxes, utilities, etc.)
- Proof that you have the funds to cover any closing costs
Lenders or mortgage brokers/agents will rely on the information you provide. This information helps them find the mortgage option(s) and/or lender(s) that are right for you. It is critical that you are completely honest when providing them this information. Errors in your application can easily lead to a mortgage that is not right for you or fit for your circumstances, plus misstating facts or providing false information in your mortgage application can have serious consequences. You could face up to 10 years of jail time.
Lenders and mortgage brokers/agents are expected to ask questions and seek additional information in the event of inconsistencies with the information you provide.
Debt Service Ratios Analysis
Your mortgage broker/agent or lender will need to make sure that you can carry a mortgage. They will do this by performing a Debt Service Ratio Analysis, basically comparing your debt to your income to see whether you can afford the mortgage loan you want.
Most lenders will require that your monthly housing costs (Gross Debt Service), including mortgage payments, property taxes, condo fees and heating expenses, are no more than 32 per cent of your gross monthly income.
They also want to know that your total monthly debt load, including for example car loans or leases and credit card payments (Total Debt Service), is not more than 44 per cent of your gross monthly income.
As well as qualifying for the mortgage loan at the rate offered by the lender, if you are putting less than 20 per cent of the purchase price down and are therefore applying for a high-ratio mortgage, you will also need to qualify at the Bank of Canada’s five-year fixed posted mortgage rate, which is usually higher. In that case your lender will also require that housing costs are no more than 39 per cent of your monthly income.
This extra “stress test” is the Government of Canada’s response to the sharp increase in house prices in certain Canadian cities, and concerns that currently low mortgage rates will eventually rise. All home buyers applying for a high-ratio loan, and therefore requiring mortgage insurance, or those required by their lender to get mortgage insurance for other reasons, are subject to the “stress test”. It assures mortgage lenders that the home buyer would still be able to afford the mortgage if prices or rates increase.
If you have already identified a property, your lender or mortgage broker/agent might need to analyze the property to ensure it is worth enough to provide security for the mortgage loan.
They might want to view the property online with you, view the property listing on MLS or a self-listing website and/or obtain a property appraisal or home inspection to determine fair market value. You may need to negotiate access to the property with the sellers, and you will be responsible for paying appraisal and home inspection fees, unless a lender pays as an incentive for you to sign up.
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Completing the Application
If you are using a mortgage broker/agent to find you a loan, once they have your approval to approach a particular lender, they will complete your application including information about the property if you have chosen one, and information about you from your meeting. You should be asked to sign a written acknowledgement that they have disclosed the risks associated with the mortgage they have presented.
If you are dealing direct with a lender, you will complete the application with them.
The mortgage application will include basic information such as your name, address and telephone number, social insurance number, employer, income, number of dependents, and the name and address of your bank or other financial institution.
The application will also detail: your assets, such as mutual funds and RRSPs and liabilities, including credit cards, credit lines, loans or leases; the purpose of the loan; mortgage loan amount required; the type of mortgage loan you want; the mortgage term, amortization and interest rate you seek; plus a description of the property you want to purchase such as address, size, type and construction.
Make sure you read the application carefully before signing it, and never sign an incomplete form.
You’ll also need to sign a Credit Authorization Form giving the mortgage broker/agent or lender authorization to perform a credit check. A mortgage broker/agent cannot and should not request a credit report without prior consent from you.
Credit Bureau Check
A credit report from a credit bureau will tell a potential lender how well you have paid your debts and bills in the past, your outstanding debt levels, and employment, income and residence history.
The credit bureau report will include a credit score - a single indicator of how likely you are to repay your loan at the agreed upon terms. It summarizes all the information available about you and provides the findings as a single number.
The report will also include information about any bankruptcies, collections, judgments, garnishments or liens against you and whether you have gone through a foreclosure or Power of Sale proceeding in the last five to seven years.
Neither the lender nor your mortgage broker/agent will be able to give you a copy of this report, but can discuss issues with you and must note these issues in the mortgage application.
While the mortgage broker/agent or lender is required to do a credit check, you can always also get a copy of your own credit history and make sure it is complete and accurate. Doing this early in your home buying journey and before you meet with a mortgage broker/agent or lender gives you the chance to re-establish a good credit history if the report shows you currently have poor credit.
Once completed you’ll sign the mortgage application form, confirming that the facts on the application are correct.
Negotiation and Commitment
Once a potential lender lets you or your mortgage broker/agent know that they are willing to advance the loan, you or your mortgage broker/agent will then start to negotiate the deal. You’ll discuss a final mortgage rate and term for the loan and you or your mortgage broker/agent might need to supply more documentation to support your application.
Once you receive the official Mortgage Approval or Letter of Commitment, make sure to review all of the terms and conditions before you sign and return the agreement.
Closing Process Liaison
Once the lender has received your signed agreement the closing process will start. Your mortgage broker/agent may continue to liaise between you and the lender and perhaps even the lawyers involved for you and the seller.
Ongoing Mortgage Administration
If you have used a mortgage broker/agent to help you find a mortgage loan, and their brokerage is also licensed as an administrator, after the property sale closes and the funds are provided by the lender, your mortgage file may be sent to the mortgage brokerage’s administration department. They’ll track payments, calculate outstanding loan balances and might collect municipal property taxes. They may alert the mortgage broker/agent when your mortgage term is near completion so that the mortgage broker/agent can assist you with renewal or the selection of a new lender for the next term.