5 Tips to Avoid a Mortgage Meltdown

Mortgages are undoubtedly a huge factor in the home-buying process. Here are five things to heighten your knowledge of mortgages and the conditions to finance.

1. Property type makes a difference

Each property type has its own lending restrictions. If you are buying and have pre-approval, this does not always mean this amount applies to every property type. If you are approved for an amount on a single-family home, it will likely be less for an acreage or rural property because banks need adjusted loan to values.

The same goes for condominiums, as condo fees affect a buyer’s debt servicing, meaning they will qualify for less than their pre-approved amount.

Many banks also have restrictions for lending on mobiles or leased land. Only certain banks will lend on these property types, so it’s important to inform your mortgage broker of the property type ahead of time so they can connect with the right banks.

2. Properties with unique features may affect a buyer’s mortgage

Unique property features include solar panels, cisterns, and design features such as dome or log homes. These features may come with their own set of hurdles, as getting home insurance with these features can be difficult, affecting the bank’s ability to lend.

The banks may require special inspections to be completed as a condition of their mortgage commitment letter, which can take additional time depending on how busy the inspection companies are.

If you are in the market for a home with a unique feature, start contacting insurance companies ahead of time. In the case of solar panels or cisterns, it can be helpful to have the details of the installation and the quality testing results available to provide to the mortgage broker.

3. Price should not vary more than the pre-approval amount

If you are purchasing with less than 20 percent down, your bank will likely use one of Canada’s high-ratio mortgage insurance companies, such as CMHC, Sagen, or Canada Guarantee.

These companies are very strict on how they allow banks to lend, as there’s no wiggle room on the debt servicing. Even with pre-approval, there is no guarantee that it will be accepted. The best way to find out is to submit a mortgage application to the bank so they can begin their review.

4. Condition to finance is a weighty process

Even with a pre-approval, you may need a realistic timeline to remove this weighty condition. Two weeks from the offer date to the removal date is highly recommended, as the bank will need time to review the mortgage application and supporting documents. It also takes time to communicate back and forth between the mortgage broker, you, and the bank – especially when it’s busy!

A mortgage commitment letter is not a completed mortgage and does not mean you’re in the clear to waive a condition to finance. A mortgage commitment is a letter stating that your application has been received and will be approved once everything on your mortgage application can be verified.

A mortgage commitment has conditions the buyer and mortgage broker must provide before the mortgage is officially approved. Once approved, mortgage instructions are sent to the lawyer. Remember, mortgage instructions are only sent when the bank is satisfied with all the conditions in the commitment, not the broker!

5. Mortgage brokers are super connected

Mortgage brokers can access multiple lending sources, from A-lenders to alternative B-lenders and insured and private mortgages. However, when buyers are forced into tight condition deadlines, it can force mortgage brokers to go with a lender that has significantly higher rates and fees than a buyer may have been initially okay with.

This can negatively set you up to manage difficult payments, and you may not be able to refinance in the future. While these alternate lender sources can ensure a deal closes, they can leave you feeling buyer remorse.

Quick tip!

If there is any hint that you need financing to close a purchase, you should not submit an unconditional offer. An unconditional offer has risks and ripple effects.

Understanding each part of the process will allow a confident and positive buying experience! When buying a property no one wants to see the purchase fall apart because of financing issues. If in doubt ask your mortgage broker to clarify any questions and concerns.