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(December 24, 2021)

Intro (pre-amble): up to 14:55 mark of podcast (BulletproofMortgagePreApprovals | Relax, you’ve been stress tested! | 122,748 New Canadians | City Hall & Pitchforks)

In a hot market like we are in right now, mortgage pre-approvals have become front and centre…particularly, the quality and legitimacy of them. Here in Vancouver (and I am certain in Toronto as well), buyers are placing offers with no financing conditions…and even though I strongly advise against it, I continuously keep on getting subject free offers, one after another. So at the very least, my goal with this blog post is to make sure that people realize that the more work you put into the pre-approval process, the smoother and less stressful your time-restricted purchase process will be.

Step 1 – Get your credit score where it needs to be and deal with any issues you currently have

Whether you qualify for a mortgage through a bank, credit union or other financial institution, you should be aiming for a credit score of 680 for at least one borrower (or guarantor), especially if you are putting under 20% down. If you are able to make a larger down payment of 20% or more, then a score of 680 is not as critical. However, whatever you do, avoid dipping below a score of 610…you may still qualify for a mortgage, but your interest rate will likely be higher.

If your credit score does not meet the minimum requirements, follow these steps:

Pay your bills on time
Avoid carrying balances on your credit cards that are greater than 60% of your limits…this directly impacts your credit by decreasing your score
If you are currently carrying a credit card that is max’d and you are not able to reduce it, consider transferring some of the balance to another credit card (or line of credit) so as to come within a 60% balance to limit ratio. So basically, you are borrowing from Peter to pay Paul. Not a long term strategy to pay down your debt, but definitely a quick fix credit score booster in the short term.

Avoid petty disputes with creditors. Take the hit and pay up, or suffer detrimental credit downgrades and derogatory ratings that eventually end up being deal killers to mortgage approvals.

Step 2 – Have your down payment funds confirmed and ready to go

The minimum down payment requirement is 5% of the purchase price. It is critical to disclose the source of your down payment to your mortgage broker as not all sources of down payment may be acceptable for your particular qualification.

Here are some examples of down payment verification:

Gifted proceeds from direct family members are acceptable, but the amount that is acceptable varies with qualification guidelines
Proceeds from abroad must be meticulously documented from its originating source (documents must also be translated in English)
Borrowed funds can be used for down payment, but your mortgage qualification amount could substantially be reduced as a result
60 to 90 day history disclosures are required for essentially all down payment proceeds UNLESS you have sold an asset or property. In this case, you would have to provide a paper trail verifying the sales transaction of the asset and the deposit of funds into your bank account (i.e. investments, vehicles, property, etc). 60-90 day verification for gifted down payment proceeds are rarely required.

Step 3 – Understanding and selecting the right mortgage product for YOUR particular circumstance

Rate is only ONE of the many features in selecting the best mortgage product that meets your financial goals. Here are some other features to be aware of when selecting a mortgage product:

Mortgages with minimal discharge fees (penalty) in the event you sell your property ahead of its term
Cash Back mortgages that advance as much as 5% of the mortgage to be used for whatever you desire (pay off debt, purchase furniture, renovate)
Purchase Plus Improvement Mortgages advance up to 10% of the properties value to be used for immediate improvements to the property
Enhanced prepayment privileges are available on some mortgages that allow you to make larger lump sum payments towards your mortgage principle throughout your term and in some cases allow for unlimited lump sum payments without any penalty charges
Auto-HELOC mortgages allow your ongoing paid mortgage principal to automatically convert to accessible equity on a monthly basis

Step 4 – Accept the fact that you will have to provide a large amount of documents

When you apply for a mortgage, you will typically need to provide a standard package of documents, which almost always includes:

Your government-issued personal identification
most recent pay stub
employment letter
most recent 2 years of personal income tax documents (Notice of Assessments, T-Slips, and T1 Generals)
if you are self employed (incorporated) the most recent 2 year Business Financials may also be required
3 months of bank account statements
90 day verification of your down payment proceeds (see above if you are not able to display a 90 day history)

Prepare to provide documentation to explain any unusual (generally non-payroll) large deposits or withdrawals over $2,000 as per the Proceeds of Crime (Money Laundering) & Terrorist Financing Act enacted by the Government of Canada and applicable to all lenders in Canada.

Step 5 – Get it all on Paper

After completing all of the above, you should now have completed a legitimate mortgage pre approval! Along with reaching this milestone, you should also be provided with some type of document or detailed email that includes several analytical details and a summary list of the critical qualifying conditions. At this stage you should have all your questions answered and be fully informed of your qualification. The following points should be disclosed in a mortgage pre approval report:

the maximum mortgage amount should be calculated and outline in particular detail
a purchase scenario should be illustrated to include all potential fees and closing costs so that you are aware and fully understanding of what your cash-to-close requirement will be. This scenario calculation should include any or all of the following as applicable: insurer premium, broker fee, lender fee, property transfer tax, etc.
disclosure of your credit score and instructions or requirements to maintain it throughout the qualification period
and lastly, a detailed list of the critical conditions upon which the qualification is based upon (i.e.maintaining your employment, your credit score, paying off particular debts, providing updated income documents every 30 days leading up to the day your pre approval becomes live, etc)

Getting approved for a mortgage is a time consuming process and during a live offer on a property, time is of the essence. Having to make critical decisions in a limited time frame and when you are highly emotional is a recipe for disaster. Get fully prequalified and refer back to your pre approval document as a guide throughout your buying process. For more info on mortgage pre approvals, Click Here to listen to my past podcast episode, “Is your mortgage pre approval legit?”.

Step 6 – this is for people who are considering placing a subject free offer…HAVE A BACKUP PLAN IN PLACE

This is probably the most critical step of all (if you are placing an offer with no financing conditions). I’m not sure that many mortgage brokers do this, but I certainly do. If you plan on going subject free on an offer, prepare to not just complete all of what I just stated above, but also prepare to have a conversation about what your backup plans are in the event you are forced to move in that direction. HERE are the most common backup plans that I have experienced over the last several years:

Have a parent (or anyone else) on standby to jump in as a co-applicant or cosigner
Have a parent or close family member on standby if a larger down payment is required
Understand and accept the consequences of potentially proceeding with a “Plan B” mortgage with a higher interest rate and additional fees

The bottom line…subject free offers are risky to begin with, but they are especially risky if you don’t have a back up plan.

Step 7 – You are now ready to shop for a home!

With your fully vetted mortgage pre approval in hand you are now ready to start shopping for a home! And remember, even though you are pre-approved, always insist on requesting financing conditions in your offer regardless of how strong your pre approval report is. Be aware that the one critical item that is not accounted for in a mortgage pre approval is the subject property itself. It is possible that lenders could reject a property and decline the mortgage application. So whenever possible, protect yourself and request financing conditions.