June 1 stress test, easing of guidelines and 11th Hour Mortgage Qualification Collapses!

Mortgagenomics Canada

11th hour mortgage qualification collapses...how to avoid them

There is no better feeling than closing a real estate transaction, especially if the journey to get there was rocky and filled with intense drama all the way to the bitter end. And if you’ve ever purchased a property before, you’ll know what I’m talking about...Regardless of the severity of these unexpected stressful deals, in most cases the real estate Gods (eventually) step in and somehow, magically, allow the deal to close out. But in some cases they do not appear (the real estate Gods) and you are left to fend for yourself without any spiritual or outer universe assistance. So listen on if you’ve been in a similar situation, or better yet, especially stick around if you haven't been in a stress-pot-real-estate-thriller transaction..as you never know what awaits you on that next offer!

Today, I want to share my real life 11th hour experiences with you (and some are also borrowed from fellow brokers I've known over the years). Rather than prolonged details, I've summarized the close encounters I've had over my 17 years as a mortgage broker in Calgary's boom and bust market and more recently, Vancouver's stratospheric, unpredictable, bullpen-market. At the very least, I offer you these experiences to share with your family, friends, colleagues and your clients. The more we can prepare for the unexpected, the better the home buying experience will be...you can never be too careful (or too prepared)!

To start off, I’m gonna break it down to 2 classification groups when it comes to 11th hour mortgage qualification collapses:

the first one being...Property Related Issues that affect mortgage qualifications: (these are unforeseeable and unconfirmed in the mortgage pre-approval stage)...here are some real life scenarios that popped up in past deals:

• the appraisal comes in lower than the contract purchase price and as a result, the mortgage qualification criteria is escalated to a higher standard of adjudication (escalates from a less restrictive conventional qualification guideline to a more restrictive high ratio guideline). For example, if you qualified with a 20% down payment, but suddenly the lender has now reduced their loan-to-value ratio to reflect the lower appraised value, this could result in drastic qualification differences from what your original approval was based on. If your qualification was tight already, this will be even more challenging and potentially deal breaking
• Once again, the appraisal comes in lower than the contract purchase price and as a result, the applicant must now come up with the shortfall cash-to-close proceeds as the lender proceeds to only lend based on the appraised value, not the contract price. This is quite rare in strong markets, but can certainly surprise in a peak market environment (kinda like the one we are now experiencing in many regions across Canada)
• Here’s another one: Property deficiencies that may arise from an appraisal that could have serious consequences to the status of your mortgage qualification (i.e. degraded/compromised property features: cracked foundation, former grow op, general condition compared to other properties nearby, remaining economic life, etc.)...be very careful with removing conditions when the appraisal is still outstanding or pending. Even though your property passed the grade with your home inspector, don’t assume that it directly translates to a passing grade with the appraisal.
• Property Limitations/Restrictions: some properties have age restrictive rules within the strata rules, or rental restrictions
• Unique/Niche Property Characteristics that arise when land title is pulled: fractional ownership, recreational/agriculturally zoned properties, leased land properties (native leased land, crown corporate leased land, and other private leased lands)
• Strata/Condo Issues: outstanding/pending litigation, ongoing/pending special projects or levies, inadequate amount of fire insurance for strata especially in light of recent strata insurance price escalations. I don't understand why, but some lenders allow mortgage brokers the option to forego the condo/strata document review and defer it to the lawyer...avoid this, make sure the condo/strata documents are reviewed and signed off on during the conditionally accepted stage of the process

Ok, the 2nd classification group when it comes to 11th hour mortgage collapses...Mortgage Qualification Related Issues: (and this group is mostly preventable if the mortgage pre-approval is reliable)

Here are some mortgage qualification red flags to be aware of when you're in the process of getting pre-approved...these are critical and if not accounted for will lead to immense stress and disappointment when you're satisfying your mortgage conditions during the financing conditions period, or worse yet after the financing conditions have been released. The following stress points could have been avoided had all the verification documents been requested of the applicant PRIOR to submitting an offer rather than during the offer acceptance period or worst yet, AFTER the financing conditions have been removed

• disclosing that you own a business, but not revealing that you are one of a few owners of the business until after the subject removal date (this could affect how much income a lender will allow you to declare as income from your incorporation...always make your broker aware if you are one of several shareholders/owners of your company, don’t assume they will simply pick up on it)
• delaying on your down payment verification until after the subjects removal, then revealing that some of the proceeds are from borrowed sources. The borrowed proceeds are then deemed ineligible and the applicant is forced to seek alternative down payment proceeds
• delaying on employment letter until after subject removal to then discover that there unexpected conditions of employment (i.e. probationary period, status of employment, lower pay scale than expected, etc)

Even if the applicant and the broker were fully diligent with all verification documentation well ahead of an offer, the following stress points could still arise during the conditions period or even later in the process:

• unexpected and unexplainable drop in the credit score
• unannounced significant purchases after subjects have been removed (i.e. new car)
• unexpected change in employment status
• unannounced change in employment (new job)
• unannounced/unexpected mortgage qualification rule changes

So there you have it, just a few cautions and red flag pointers to be aware of when qualifying for a mortgage. The bottom line thing to remember is to make sure that your broker is interpreting your information correctly. DO NOT let a misinterpretation pass between you and your broker...don’t make the mistake of feeling you have gotten away with one because 9 times out of 10 it will be discovered and worse yet, it will be discovered at a time when you have removed the subjects on your offer. And regardless of whether you can fulfill the 11th hour qualification criteria, a lender will hold you to it 100%. Ok, so you don’t want to be in that spot...be transparent with your information and never assume things when it comes to mortgage qualifications. Ask lots of questions, AND answer questions truthfully and as accurately as you can, and don’t hold back on critical information. Follow THESE basic principles and your mortgage approval process should go without a hitch.

Contact Marko, he's a Mortgage Broker!

604-800-9593 direct Vancouver

403-606-3751 direct Calgary

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