By Parmida Modiri, AMP
As useful as a mortgage pre-approval is, it is still not concrete enough to remove the financing condition with it. There are different factors that can alter the final mortgage approval.
Let’s start from the beginning; clients get a mortgage pre-approval based on their actual credit history & verbal explanation of income. The mortgage pre-approval sets a limit for client’s real estate agent, which discloses: maximum purchase price, minimum down payment, maximum condo fees (if any), and an estimation of property taxes. The real estate agent searches and finds the right property that would fit in to the criteria of the mortgage pre-approval – So, clients prepare an offer and listen to the important advise of the mortgage agent and put in condition of arranging mortgage financing which gives them 3-5 business days to arrange from the day the offer is to be accepted by the sellers. Let’s get more into depth on this 3-5 business days financing condition, what are its benefits?!
If financing doesn’t come together for reasons I will get further into in a few seconds clients would not lose their deposit if the financing condition has not yet been waived (What is a deposit? When clients put on offer on a property they need to have a certain amount of deposit which would basically act as a security deposit for seller’s peace of mind – Usually this can be anywhere from $5,000 – $15,000)
That being said, even when financing condition is not waived & client’s money isn’t wasted the fact that the mortgage could not be approved and therefore purchase not going through is stressful for clients and also frustrating enough to have the real estate agent who spent lots of time finding the right property and competing to get the sellers to accept the offer become very angry. To understand exactly why financing could not be arranged helps relieve the frustration and eliminates the pointing fingers to the mortgage agent, lender & even default insurance providers. So, here are five of the most common reasons why a pre-approved client is NOT able to get the final mortgage approval:
1. Income Documents Not Matching the Original Verbal Amounts: All the information that is given at pre-approval stage must be verified once there is an agreement of purchase & sale in place. So, the safest way is to ask clients for all paper work before their financing condition is due. At this stage, what’s on paper should match what was verbally given at pre-approval stage. If not, then approval may no longer be obtainable as numbers would no longer be in line.
2. Lender &/Or Default Insurance Provider (CMHC, GE, AIG, Etc.) Not Approving of the Subject Property: It is not only the clients that lenders & insurers (mortgage would have to be insured for the lender’s sake depending on the down payment amount) qualify in order to give them the mortgage financing; they also need to approve of the property they are lending money for. For example, if the property turns out to be a co-op housing, or previously a grow up house, or rooming home then it is no longer a desirable property for most lenders &/or insurers to want to lend money for.
3. Drive By Appraisal or Full Appraisal Report Showing a Lower Market Value for the Property than the Actual Purchase Price on the Agreement of Purchase & Sale: Lender would only lend money based on what the current market value of a home is, so if for instance client really wanted the property badly and saw future in it they may have agreed for a purchase price higher than the actual current market value of the home. What happens in this case?! The lender would only lend a percentage of what they believe to be the current market value so client has to come up with the difference on top of the down payment amount they had previously planned on putting down. In some cases, clients may no longer be able to proceed if they don’t have the additional funds!!!
4. Unverifiable Down Payment Amount: With all the money laundering issues, you cannot possibly blame the lender for wanting to know where the down payment is coming from. Also, since down payment cannot be borrowed then we need to make sure enough documentation is provided to prove it. If client said at the pre-approval stage that they had savings for down payment, then they need to be able to show three most recent months bank statements to show the money has been in the account instead of showing a bank statement for three months which shows all sorts of large deposits going in during those times!!!! The most common explanation we get from clients is “people owed me money, so I started collecting back for my down payment”. So then client would have to be able to get letters from each of those people with their contact information confirming that is a fact & if client is unable to do this then you can imagine how this could jeopardize the mortgage financing approval. To avoid this, it’s best to say it exactly how it is at pre-approval stage and instead of saying it’s in savings, say it is to be paid back by people who owe me money!!!
5. Income Conditions Changing Before Lender’s Verification Takes Place: Clients lose their job or decide to suddenly quit in the midst of verifying the actual income for their mortgage financing. Life changes happen all the time, some changes cannot even be controlled and are not necessarily planned out or wanted. So, again no guarantees and this would definitely alter that mortgage pre-approval because client’s situation is no longer the same therefore approval may no longer be obtainable.
Parmida Modiri, AMP is an Accredited Mortgage Professional with Signature Service Financial. Parmida can be reached at parmida@ssfi.ca. Mortgage Agent, Lic. #: M08005765
