The most common question I get asked from clients is, "what's the best rate". While rate does matter, choosing a mortgage product based solely on rate can be a costly mistake. All lenders calculate break penalties differently, and it is no wonder that big banks try to lure us in with 5 year fixed rates. More than 2/3 of home owner's break their term early (average is 3.5 years) when they move and don't port, get divorced, refinance, or revert back back to renting. Fixed rates with mono-line lenders (dedicated mortgage lenders) are the safest fixed option, as they calculate the break penalty based on your actual interest rate, whereas big banks calculate the penalty using inflated "posted rates that are 2-3% higher than your actual rate. With all of the uncertainty in our current climate, now more than ever it is important to review lenders with more flexibility, smaller break penalties, and to review the flexibility that goes along with a variable mortgage. Click here to read about a client who lost her job and the bank charged her more than $30,000 to break her mortgage.
After reviewing the questions below we can discuss the best rates available to the client. I hope you find this interesting!
1. Fixed or Variable?
2. If fixed, 1 Yr,, 2 Yr., 3 Yr., 4 Yr., 5 Yr., 7 Yr., or 10Yr.?
3. If variable, which lender? Each lender has different features and policies.
4. Do they want a line of credit now, or option in the future?
5. 20% down or less, can they reach 20% down?
6. Portability between provinces?
7. Do they need the flexibility to put down large lump sums?
8. Who wants to be on title?
9. Will title be held in the name of a holding company?
10. Origin of the down payment (e.g., gift, investments, out of country, line of credit, etc.)
11. Are all applicants' income taxes filed and up-to-date?
12. Is there a commission, bonus or overtime component to the income?
13. Have they had a consumer proposal or bankruptcy filing?
14. If part-time, are hours guaranteed, do we have 2 years tax history?
15. Are there any debts that might not show up on one credit report but might on another?
16. Does the client own other real estate?
17. Was their previous mortgage insured (less than 20% down), how long have they owned it, is it a rental now, which insurer is it with?
18. Does it make sense to port the default insurance over to the new purchase if they are selling the other one? (there are top-up premiums on the new money)
19. Is the client aware of the legal fees and closing costs?
20. If a new build, does the builder need progress draws, if so, where is the property?
21. If a new build were there incentives included in the contract?
22. Was the property ever a grow-op or drug lab?
23. Are extensive upgrades planned?
24. Is this a fix and flip, rental, or long term hold?
25. Have any of the applicants been divorced, or ar in the process of separating? Do any of the applicants pay spousal or child support? Are they current with their payments?
26. Has the deal been sent in somewhere else? What did that lender say? What did the insurer say? Which insurer saw the deal?
27. Does the client have late payments showing on their credit bureau in the last year? How many? Why were they late? Which lender?
28. If the clients own rentals, are any of the condos? What are the condo fees? How much rent is coming in? Do they have deposit history and does the rent show on their tax returns?
29. Have any of the applicants had their employment affected by COVID-19?
30. Are any of the applicants on work visas or student visa? Have they been in Canada longer than 5 years?
31. Do they have established credit since coming to Canada?
32. How long do you see yourself living in at this home?
33. Are any of the clients self-employed? Do they have two full tax years of self-employed income?
34. Do the clients own their own business? Do they T4 themselves?
35. Is the property an acreage? What town or area are they interested in?
36. Is this a refinance (equity take-out), switch/transfer, owner-occupied purchase, or rental purchase? How much equity do they have in the home?
As you can see, there are a lot of factors affecting a mortgage approval. Time and time again clients come to me after getting "pre-approved" elsewhere, and then having their deal declined when the deal goes live. If these questions aren't covered prior to a live deal, and if the documents aren't reviewed prior to a live deal, a mortgage pre-approval cannot be granted. Once I've covered these bases with the client they can rest easy know their approval is in stone. I hope this snapshot gives you a bit of insight into what goes on behind the scenes on a mortgage approval.
The majority of this list comes from a book called "Be the Better Broker V1" by Dustan Woodhouse (2015) who is the President of one of Canada's national mortgage brokerages.