How to get a mortgage. Is it anything like going to the circus?
How to get a mortgage. Is it anything like going to the circus?
I seem to be you using the term “jump through hoops” with clients more lately so I thought I would like to write a post regarding the standard processes and requirements for obtaining a mortgage currently so as to help appropriately set expectations and prepare.
Getting a mortgage is a big deal. It is likely the largest amount of money one will ever borrow and can easily be in the several hundred thousand dollar range. Institutions loaning the money will likely only ever have the documents provided/requested to go off of when deciding whether to approve a mortgage or not. They do not know you, your daily habits, personality, if you are responsible or not,what your future plans are, what you have been doing in the past, etc.
The bank and insurance companies are trying to get to know as much about us as possible simply through documentation we provide and they ask for. One can also imagine if we are to loan someone several hundreds of thousands of dollars of our own money, what would we want to know to ensure the person(s) we loan the money to …:
- Is able to make every payments on time
- Has proven record of managing credit (length of time, access to large amounts to demonstrate responsible use, etc.)
- Stable and “good” employment (history at same job & same industry, income amount & stability, if self-employed length of time, industry, & proven income on taxes, etc.)
- Is the property in a prime location and marketable to a mainstream market
- If the property is a strata is/has it been well managed
- Where is the down payment coming from (did the client work hard & save their own money, is it borrowed, if so what is the re-payment terms, is it gifted, if so from whom, etc.) and can it be confirmed (the source of the money needs to be confirmed and “make sense”)
The above points are just some of the questions that banks and insurance companies go through and have to have answers on to approve a deal. This process is completed through supplying standard documentation that can confirm what is needed and required. There is no doubt that it will take some time and effort for a client to gather the required documents and depending how organized they are, or not, it could take more or less time. There are also some documents that may need to be ordered (e.g. strata documents, tax forms, documentation for a business, etc.).
Below are some comments/questions that have been the source of some frustration and I would like to comment on each:
- I have good credit – “good credit” is a bit of a subjective evaluation. Typically 5 points of credit are reviewed together to come up with the overall credit evaluation of an individual(s). Character (integrity), Capacity (ability to pay), Capital (net worth, down payment), Collateral (property), Conditions (borrower and economy).
- But I own a lot of assets – Assets are a good thing to have, however, outside of the down payment, banks and insurance companies typically do not care to confirm you own the assets. Reason being is they will approve, or not, your mortgage based on if they feel you can afford the payments and make the payments from the income you make and can confirm. They do not want to take the position that if times get tough you will start to sell off your assets and make your payments this way.
- I have a good job, now – Having a good job and making good money is of course a good thing, however, by itself it is not enough. Stability and length of time in a job and line of work are both required to demonstrate that it can be expected that both will continue for the foreseeable future, the same goes for income. So for people whose income can or does fluctuate (e.g. part-time employees, salary + commission) typically a 2 year average of income is used to get an expected ongoing income amount. This should be viewed as a good thing in that it can average up a previous low year of income or it can also ensure one does not borrow more than they should if numbers are based on a higher than average year of income which may lead problems down the road.
- I have a large down payment – Although a large down payment is usually a good thing in that banks can view it is more invested into the transaction and property, it is not the only thing that matters. By this I mean income that can be confirmed is what makes the payments required for the mortgage, regardless of what the down payment is. Banks want to always receive your payments and they never want to take possession of the house. Banks are in the business of loaning money, not owning houses.
So how does getting a mortgage tie into going to the circus? Well maybe it does not totally, except that some form of the hoops/rings, metaphorical or literal, are involved with each.
I hope that the above assists a bit in putting into perspective how when borrowing such a large amount of money,banks and insurance companies will require a certain amount of documentation (i.e. jump through hoops) to be able to confirm all important aspects to the transaction (credit, income, property, down payment, etc.), in addition to being quite strict with what they are looking for in each piece.
For more information and/or for help to prepare for getting a mortgage or re-doing a mortgage you already have. Please contact me at anytime.
Your mortgage broker in Vancouver, BC
Maury@MauryLum.com / (604) 603-2520 / www.MauryLum.com
