Headline: Having your ducks in a row reduces mortgage approval related stress by 85 per cent!
Maybe not actually a headline, and the statistic is decidedly subjective.
However, after a few conversations with clients over the last few weeks, I thought mortgage documentation might be worth explaining.
I’m going to qualify the information that follows by saying that what follows is based on my experience and process for working with clients. Each banker or broker works a little differently.
In my early days as a broker, I would take my clients’ information and complete their application. I took at face value the information they provided.
When they wrote an offer to purchase a home, I would send their application in for approval. Based on the conditions that came back from the lender (with an approval), I would have my clients start to gather documents to support the information they gave me originally.
I experienced a few uncomfortable situations. For instance, with one file where the parents were signing on the mortgage, I asked if they had a mortgage on their home.
They said no.
A week before closing, much to my horror, I learned that while they did not have a traditional mortgage, they did have a large line of credit with the house registered as security. I had to add in a payment of almost $3,000, which almost collapsed the financing.
From this situation, I learned the importance of fine-tuning my questions during our initial interview. I also incorporated the practice of pulling title searches so I knew exactly what I was working with.
Working on another file some time later, the client told me he made $80,000 a year. Beautiful, I thought. The application should sail through.
When his employment confirmation arrived, I learned was that he had actually made $60,000 the previous year. He thought he would be working lots of overtime so told me the figure he thought he was going to make.
While great learning opportunities, these are situations I never want to repeat.
My process now looks very different.
During my initial conversation with my clients, I ask very specific questions. Based on their particular circumstances, I send out a detailed list of the documentation I require to have their application approved.
The list looks slightly different depending on whether they are T4 employees, self-employed, or pensioners. The list also changes if they are doing a refinance as compared to buying a new home.
I also make sure I let them know that despite gathering most of their information up front, each specific lender has slightly different requirements, so we might need to collect more paperwork down the road.
My list can seem daunting, but what I have found is that I am able to be far more accurate in terms of pre-qualifying clients to go home shopping. I’ve also found that having all of their paperwork up front (or at least being collected) helps to minimize last minute stress and surprises.
If you are getting ready to buy a home, there are several key documents I suggest you start to organize.
First, lenders will be looking for confirmation of your employment history and earnings.
Make sure your income tax returns are filed up to date, and any balances owing to Canada Revenue Agency are paid. Keep your tax returns, T4s, and receipts together. Generally you will need to document a two-year history.
When you have an accepted offer to purchase a home (or if you are moving forward with a refinance or switch), you will be asked to provide a verification letter from your employer along with a current pay stub.
Next, lenders will need to know where your down payment is coming from. They will ask for a three-month history of your savings account (or RRSPs, investments, etc). They will question any large deposits, so you will need to have documentation to show where they have come from.
If your down payment is coming from the sale of your current home, you will be asked to provide a current mortgage statement and a firm offer for sale on the home.
If you are refinancing your home or switching your mortgage to another institution, the new lender will request a current mortgage statement so they are able to have accurate numbers to work with.
You will need to provide a copy of your city property tax notice and a copy of your home insurance policy.
If you have had issues with credit in the past, it is critical that you keep receipts and statements showing you’ve paid any outstanding debts or collections.
For clients who disclose up front that they have had challenges with credit in the past, I ask them to pull their own credit bureaus so I can have a look at what we are working with.
I worked with a couple recently where the wife had an outstanding collection on her credit report. She had paid it in full over five years previously. She had all of the documentation to prove that it was paid, including a letter from the creditor.
We were able to send the information to Equifax and have her report corrected, which made all the difference in the amount they then qualified to borrow.
Although it may seem a little daunting, by organizing all your paper work ahead of time your broker or banker will be able to deal with any issues up front and more importantly you will be able to focus on all of the other decisions that need to be made once your offer is accepted.