Looking to buy your new home is an exciting experience. All the possibilities. You look and you look and you look. You go to open houses, have your realtor take you into house after house, then all of of sudden you walk into one house and bang it hits you, home! You literally can feel it, this is the place that right for you.
You make an offer, it’s accepted, you get a mortgage commitment from your lender, you can waive the condition of financing, right?
Not so fast!
Know the risk you are taking on.
“Did you know that a mortgage commitment isn’t a promise that you’ll get your mortgage? That’s right—many homebuyers think a mortgage commitment means the lender is committed to giving them a mortgage, but that’s not true. It’s the lender saying they will give you a mortgage if certain conditions are met.
But let’s say you feel confident you can meet those conditions. Are you good?
Hold on there, even after meeting all the conditions of your mortgage commitment, you can still sabotage your mortgage, lose this great home, lose your real estate deposit, and even get sued.
Don’t break the 10 commandments of mortgages.
The First Commandment, Thou Shalt Not Change Jobs
The Second Commandment, Thou Shalt Not Buy a Car
The Third Commandment: Thou Shalt Not Miss Bill Payments
The Fourth Commandment: Thou Shalt Not Spend Closing Money
The Fifth Commandment, Thou Shalt Not Stop Paying Rent
The Sixth Commandment: Thou Shalt Not Omit Debts
The Seventh Commandment: Thou Shalt Not Originate Credit Inquiries
The Eighth Commandment: Thou Shalt Not Co-sign a Loan for Anyone
The Ninth Commandment: Thou Shalt Not Make Large Deposits
The Tenth Commandment: Thou Shalt Not Change Bank Accounts
How do you ensure that you don’t do anything to sabotage the mortgage you’ve worked so long and hard to get?
Mortgage Journey
Applying for a mortgage is an exciting step toward homeownership, but it’s also a time that requires careful financial planning and discipline. Lenders scrutinize every aspect of your financial profile to ensure you’re a low-risk borrower. A single misstep during the mortgage application process can jeopardize your approval or lead to less favourable terms.
Let’s say you are in the midst of buying a home. You’ve made an offer conditional on financing, and you’ve got a mortgage commitment letter back from your lender. Your mortgage agent has carefully gone over all the details of the commitment with you so you understand the risk you are facing. You need to understand that a mortgage commitment is not a commitment that you will get a mortgage; it’s a conditional offer that says if you meet all the conditions of the mortgage commitment, the lender will give you a mortgage. Your risk is that if you don’t meet one of these conditions and you waive the condition of financing, not only won’t you get the mortgage, you’ll likely lose your deposit and maybe even be sued by the seller.
The Underwriting Delay
The problem borrowers face is that lenders wait as long as possible to do their deep underwriting of your mortgage file. If your accepted conditional offer has a 90-day close, your lender will likely not do the final underwriting of your file until 5 to 10 days before the closing date. They wait this long because it gives them lots of time to work on your file, but also because they know things can happen, things can change, and by waiting until as late as possible to underwrite your mortgage, they are mitigating their risk.
Knowing lenders do this, could you protect yourself by telling your realtor, “No, I won’t waive the condition of financing in 10 business days; I want to wait until I get the final approval letter from the lender, so I don’t want to waive until then, which would be like 85 days on a 90-day close.” As a former realtor, I can tell you, that’s just not practical. That would mean the seller really couldn’t be sure the property is sold firm until almost the close date. That would prevent the seller from making any plans themselves or even be certain that their property has sold.
The Risk
So the buyer takes the risk because no seller could accept a condition that expires a few days before the close. Did you know that all Canadian buyers face this risk when purchasing a home? All Canadians… except people in Quebec. Quebec doesn’t let lenders get away with this. In Quebec, you can’t waive the condition of financing without a firm, final mortgage funding letter clear to close from the lender. This forces lenders to underwrite mortgages fully early in the process and moves the risk from the buyer onto the lender. But that’s just Quebec.
Let’s say you don’t live in Quebec, and let’s say you are confident that you will meet all the conditions of the mortgage commitment. It’s important that you recognize that this is a risky time for you and that you don’t do anything to sabotage yourself by breaking one of the 10 commandments of mortgages.
So what are these commandments?
The First Commandment: Thou Shalt Not Change Jobs
Changing jobs, becoming self-employed, or quitting your job during the mortgage application process can potentially affect your application negatively for several reasons. If you fear you could lose your job because you are not getting along with your manager or you hear rumours of layoffs, it would be wise to delay that home purchase. Maintain stable employment during the mortgage application process to avoid complicating or jeopardizing your approval.
The Second Commandment: Thou Shalt Not Buy a Car
Taking on significant new debt, such as purchasing a vehicle or a boat, can have substantial implications on your mortgage application. It’s wise to delay large purchases until after securing your mortgage financing, which means getting that final mortgage approval and clear-to-close status, not simply a signed mortgage commitment. All debt is reported to the credit bureaus, so don’t think you can hide your purchase. Underwriters do a debt service ratio analysis, and just a small change in your ratios could disqualify you for the mortgage you want.
The Third Commandment: Thou Shalt Not Miss Bill Payments
Using charge cards excessively or letting your accounts fall behind will negatively impact your mortgage application. Maintaining a disciplined approach to credit use and keeping up with all bill payments during the mortgage application process is crucial to meeting the conditions of your mortgage commitment, securing your mortgage, and getting the best possible terms. Missing bill payments is the fastest way to wreck your credit score. A decline in your credit score could kill your mortgage, so pay your bills on time.
The Fourth Commandment: Thou Shalt Not Spend Closing Money
When applying for a mortgage, it’s crucial to carefully manage your finances, particularly the 4% of the purchase price you have set aside for closing costs. Keep money allocated for closing costs separate from other funds. This ensures that you can meet all necessary expenses and obligations at closing and don’t blow up the deal.
Sometimes people get excited about their new home. They want to decorate it or start buying furniture. Don’t! You could be taking on debt that will tank your deal, or you may miscalculate and need to borrow to close, which itself tanks your mortgage.
The Fifth Commandment: Thou Shalt Not Stop Paying Rent
This is not the time to act out the anger you may have for your landlord by not paying your rent. Maintaining timely payments on your current rent or mortgage while applying for a new mortgage is crucial. Keep up with your rent or mortgage payments during the mortgage application process to support a smooth and successful acquisition of new financing. Missed rental payments are reported. Pay your rent; it’s to your benefit.
The Sixth Commandment: Thou Shalt Not Omit Debts
Omitting debts or liabilities from your mortgage application can lead to several serious consequences that can impact both the approval process and the long-term sustainability of your mortgage. Be truthful and complete when disclosing debts and liabilities on a mortgage application. Lying is always worse than telling the truth. We eventually will find out anyways.
This also includes sharing your personal responsibilities, like that alimony or child support payment that you didn’t tell your new spouse about. Trust me, it all comes out; we see everything. Have those difficult conversations, please.
The Seventh Commandment: Thou Shalt Not Originate Credit Inquiries
When you’re applying for a mortgage, it’s advised to avoid initiating new credit inquiries, which can affect your mortgage application. Refrain from making new credit inquiries and taking on new debt in the months leading up to and during the mortgage application process to protect your credit score. A credit inquiry occurs each time you apply for credit, such as taking out another credit card or getting any kind of lease or loan.
It can also happen when you attempt to open a margin trading account for when you want to trade securities.
Yes, banks and investment dealers typically perform a credit check when a potential client applies to open a margin trading account. That’s because a margin account involves borrowing money to trade securities, which exposes the financial institution to potential credit risk. Conducting a credit check helps the institution assess the applicant’s ability to repay any borrowed funds and manage the associated risks.
Who knew opening a trading account could kill your mortgage?
Not sure if what you might do could cause a credit inquiry? Call me!
The Eighth Commandment: Thou Shalt Not Co-sign a Loan for Anyone
Co-signing a loan for someone while applying for a mortgage can have several potential negative impacts on your own mortgage application. Even though you’re not the one benefiting from the loan, the co-signed debt is considered your liability. This liability will impact your debt service ratios. Lenders see it
as part of your financial obligations, which makes you a bigger mortgage risk. If the primary borrower misses payments, it will show up on your credit report and damage your credit score. And if the borrower defaults on the loan, you are legally obligated to repay it.
Avoid co-signing any new loans if you are planning to apply for a mortgage. This helps keep your financial profile clean and your debt-to-income ratio low, enhancing your attractiveness to lenders.
The Ninth Commandment: Thou Shalt Not Make Large Deposits
It’s important to manage your finances carefully, especially regarding large deposits. Large deposits can be a red flag (think money laundering). Communicate with me before making any large deposits. I can provide guidance on how to manage those funds and document the source of funds properly to avoid issues during mortgage approval.
The Tenth Commandment: Thou Shalt Not Change Bank Accounts
Maintaining consistency and transparency in your financial dealings is crucial. Changing bank accounts or frequently transferring funds between accounts is suspicious. Keep your banking arrangements as stable as possible during the mortgage application process. This helps ensure that your financial profile remains clear and straightforward.
Summary
By obeying the 10 commandments of mortgages, you’ll go a long way to ensuring you don’t do anything to sabotage your mortgage commitment, meet your mortgage conditions, and get your mortgage funded.
But as I mentioned before, unanticipated things can happen. If they do, and your mortgage financing falls through, call me immediately. Don’t lose your deposit and don’t get sued. I have solutions that can pull you out of a bad situation. I’m here to help. So call me.
