06 Mar You want me to provide what? Unexpected documents your mortgage broker requires in order to arrange your mortgage
So your real estate agent has recommended that you speak to a mortgage broker and get your paperwork ready before you start looking for a house. What kind of paperwork is the mortgage broker going to ask for?
Thanks to Mark Brennan of Dominion Lending Centres for putting together this list
“What do they want that for?” No matter how much in advance that you prepare clients for the mortgage commitment with a list of conditions, this question is still asked. Everyone’s requirements are different, and documentation will be asked specific to what your mortgage request is for. This list is based on the most common reasons they are being asked for.
1. Why do they want a copy of my separation or divorce agreement?
One of those difficult life events to have to endure, and now the lender wants you dig your paperwork out of the filing cabinet to get a mortgage? In one situation however, the client proudly displayed the framed divorce judgement certificate on their wall. “Why not? I spent plenty of time and money to get it!”
Why it is needed
The agreement will specifically outline the amounts and duration of any child and spousal support payments you are receiving or have to pay. The lenders may also want to see the corresponding deposit of the support payments in your account to show the support is being paid.
It comes back to affordability. If the support payments end in six months, you are probably not going to be able to use that as income to help in qualifying for a mortgage. On the other hand, if you are required to pay support it would be considered as a liability just like a car payment.
Another reason why the agreement is needed is to confirm you have the legal right to mortgage the property. Divorce involves both federal and provincial laws including the Divorce Act (federal), and Matrimonial Property, Family Law and Dower Acts (provincial – Alberta), and only an agreement that is written and stamped accepted by the court will be allowed by the lenders.
2. Why do they need all my income tax information to prove my self-employed income?
The lender is asking for two years of Income Tax returns as well as my Notice of Assessments (NOA’s), isn’t that excessive? The NOA’s should be enough to show how much I made, I shouldn’t have to send every scrap of paper just to get a mortgage!
Why it is needed
Even as I am writing this, many lenders are shifting away from stated income lending based on what you declare your income to be vs. what it actually can be verified as. The premise was to show that the stated income was fair and reasonable for the industry you are in, but not able to prove it due to expenses you had to incur.
NOAs can also show a skewed view of income as it derived from all sources of income. Lenders will want to review the income being used is related to the business. Other income sources can still be used, but it would need to be reviewed that the income will still continue.
For example, if you were to cash in an RRSP it would add into your annual income. This could be questioned as a possible red flag for lenders unless you could show that there was a reason behind it, or other years reflect a better financial picture.
3. Why do I need an appraisal?
“I have saved and saved, and have 20% to use as a down payment towards my new home, why do I still need an appraisal? It is not like I am a risk like a lot of other buyers?”
Why it is needed
There are two main reasons why. First, the lender will want to confirm the quality of the property with an appraiser of their choosing. After all, it is the security for the mortgage, and they want to ensure it is in good condition, and that it actually exists!
Second, an appraiser will confirm that the price you are paying for the home is reasonable and at market value for the area. This is also important for the lenders, as the Bank Act requires default insurance (CMHC, for example) to be added if the loan to value is greater than 80%.
– You make an offer that is accepted on a home for $310,000
– You have 20% to use as a down payment on this home
– An appraiser is sent out and determines the market value is only $285,000
– The lender will use the lower of the appraised value or the purchase price to determine the lending value on that home
– You are know in a precarious situation of having to pay an additional $25,000 for the lender to proceed with the loan at 80% or to add default insurance to your mortgage
4. My lender sent me title insurance documents to sign
This phone call came out of the blue one day, and was very apparent no terms were explained, or even what title insurance was: “I got an email from my lender who asked me to print all the paperwork in the attachment, sign and courier it back to them to process my mortgage, what should I do?”
Why it is needed
Title insurance is a form of protection against a loss that may come up from problems connected to the title of your property. It protects against a number of things that a solicitor’s opinion on the title may not cover.
Let’s assume that your neighbour built a fence, but the posts were drilled and the fence built over his property line and into your yard. This would normally be discovered by a new survey being completed, but the encroachment is protected under title insurance. This allows you to still proceed with financing without having to obtain a formal Encroachment Agreement beforehand, which can cause additional expenses and considerable time delay.
As for sending it via email, how many can claim that they have ever read their entire mortgage document? Of those few who nodded or have their hands up, how many can say they understood everything that they read? I strongly recommend to the frantic caller that I spoke to that if the lender is not going to send someone to you, or have you go before an experienced representative to explain the contract, that you consult the expertise of a lawyer to review the documents before signing anything.
5. My lender asked me to bring in copies of my life and work disability coverage
How does that have anything to do with my getting a mortgage? I have enough to think and worry about without adding this into it.
Why it is needed
Lenders offer, and have an obligation to discuss mortgage life and disability insurance with you. Be aware that mortgage insurance is not required and must not be a prerequisite for qualifying for a mortgage. This would be considered tied selling and is in contradiction of the Bank Act section 459.1.
Insurance is such a lucrative part of the business that Banks have actually developed entire departments and invested considerable resources to train their staff on how they can sell it better. The reason that you are being asked to bring this paperwork is to show how inadequately insured you are. Insurance is a personal choice, but like any contract, be sure and review all your options before signing.
6. Why do I need to show closing costs?
One of the conditions of my mortgage approval is to show 1.5% closing costs? What is that?
Why it is needed
Lenders will require you to show you have the closing costs on hand prior to sending the paperwork to the lawyer and to provide proof. Examples of some of the closing costs are:
a. Legal and title insurance fees – to pay the lawyer to complete your mortgage paperwork and register title in your name
b. Home inspection – while not required, it is highly recommended you obtain an inspection as a condition of your offer on a home
c. Property taxes – unless the lender is collecting the payments on your behalf to remit to the municipality later, you would need to start paying this almost immediately. In some cases, you may be required to pay a property tax adjustment at the lawyer when you are signing papers to credit the previous owner if they paid for the full year in advance
d. Home insurance (fire and contents insurance) – required for you to provide to the lawyer as a standard mortgage condition
e. Yard equipment – chances are the neighbors would be expecting you to cut that grass and shovel your sidewalks!
f. Change the locks – one often overlooked by new homeowners is that there may have been a chance that not all copies of the keys were returned to you, or a neighbor or friend still has a copy. Whether you choose to replace them yourself or hire a locksmith, I would make this a priority
When you go through and start adding up the costs you need to have on hand, it is clear there is more than just the down payment to consider. Ask your mortgage professional for a closing costs worksheet so you can track your own expenses.
6.5 Why do I need to show bank statements?
I need to provide three months of bank statements? How come so much?
Why is this needed
Lenders require you to show that you have proof of the down payment and closing costs on hand prior to home possession. Three months is provided to show that you have saved over time for this, and funds didn’t just appear in your account. Not only is a large deposit a flag for a potential straw buyer, but it would be a question of affordability later on if the deposit was not a regular occurrence.
So this is not an exhaustive list of items by any means, and may require updating like I do with my other posts when new situations come up. By working with a mortgage professional who can guide you through the requirements, and is on top of the changes, the process of buying a home will be that much easier.