For the next 10 Wednesdays here at Financial Uproar I’m going to post a series of articles on mortgages. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.
So you’ve decided to buy that dream house and to do so, you need a mortgage. Luckily for you, as a former mortgage broker I know a thing or two about mortgage financing. Whether you use a mortgage broker or your local banker, the application process will be pretty much the same.
The Initial Meeting
Chances are you’ll spend that initial meeting nervously waiting for the lender to approve you. You give the lender all of your information and they spend some time inputting that into a computer. Then you give them the information on the house you’re buying. At some point the lender pulls your credit report as well. Once all this information is entered into the computer you’re either approved (yay!) or denied. (boo!) The process seems very simple on the surface. Too bad it’s really much more complicated.
Even if you get approved after that first meeting that approval is only conditional. The lender requires proof of everything you’ve just told them. If you’re dealing with your bank some of this verification comes easy; after all, they can just check your account to see whether you have as much money as you say. Other verifications are a little harder and might require some hustling on your part to get these things done.
Documents You’ll Need
By the time you’re done with the whole process it might feel you’ve given a book worth of documents to your lender. Types of documents needed can be divided into 3 main categories: Income statements, down payment statements and house statements.
The lender is looking for proof that you make as much money as you previously told them you did. If you’re a salaried employee the lender will typically ask for a letter from your employer verifying you have the position and salary as stated on the application. The lender will also usually call the person signing the letter to verify that it was indeed them who signed the letter and that all information contained in that letter is correct. Besides the employment letter, a lender will typically ask for an applicant’s last 2 pay stubs.
What if you’re not a salaried employee? If you’re commissioned salesperson or a business owner, lenders will usually ask for the last two Notice of Assessments (NOA) from the Canada Revenue Agency (CRA). The lender will then take a two year average of the NOAs and use that figure as an applicant’s income.
What happens if a borrower doesn’t have two years of being a business owner? There are ways to get around this rule, but for the purpose of this discussion the borrower is basically screwed. Getting a co-signer is pretty much the only way around this rule.
Down Payment Statements
The lender is looking for the down payment to be in an account that is either sitting in cash or is easily converted to cash. The lender is also looking for the money to be sitting in that account for a minimum of 3 months. Besides that, the lender is also looking for a minimum of 1.5% of the purchase price to be available for closing costs. Stay tuned for when we discuss down payments in much more detail.
First of all, the lender requires a copy of the contract the borrower has signed to purchase the house. This contract must be signed by both the buyer and the seller and be filled out correctly. The lender is also looking for all the information about the house. (year built, square feet, etc.) An MLS feature sheet provided by the realtor will be fine for this. If the deal requires an appraisal then usually the lender will call in someone to verify the house is worth no more than the borrower paid for it.
Even More Paperwork
Do you think that sounds like a lot of paperwork? For special situations there is even more paperwork required. If a parent receives or pays child support then additional documentation is required. Sometimes a paid debt will still be marked as open on a borrower’s credit report, meaning the lender needs proof that it’s paid off. Proof of fire insurance on your new pad is also needed. There are potentially dozens of extra proofs that a borrower could be asked for, but typically only a few are ever relevant to someone’s personal situation.
Once all the proper paperwork is in, the lender submits them to an underwriter, the person who is ultimately making the decision to approve the paperwork and the mortgage. Usually an experienced broker or loans officer won’t submit a form they know will get rejected, so once paperwork is in that’s usually a good sign. Even the best organized deal will still take a few days from application to ready to go, with most taking almost a week. Being an organized borrower will take stress off both yourself and your lender, so make sure you’ve started getting these documents