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How does the mortgage approval process work in Canada? (and how to get approved fast!)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

August 1, 2019 - Karl Yeh

Thinking about or ready to get a mortgage approval? What are the steps involved? What do you need to prepare? In this episode, we discuss how the mortgage approval works and the steps involved throughout the home buying process. We also explore mortgage approval requirements including the 5 C's of credit that the bank or lender use. Finally, we talk about mortgage approval impacts to credit score, how long it takes to get approved and questions to ask your lender. 

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What we discussed:

Hi everyone, I'm Karl. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics, and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below, hit the little notification bell so you don't miss anything.

How does the mortgage approval process work?

Karl Yeh:                             

So today I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal,, and today we're going to go through the actual mortgage approval process.

 So [00:00:30] Mo, let's go step by step, how would someone actually get approved for a mortgage?

Mujtaba Syed:                  

So this process should be very simple. It's very straightforward.

You go, you book a time with your banker, your lender, your mortgage specialist, go in, they will come up with a list of documents that you need to provide.

Depending on your specific scenario, documents can vary that the bank will look for.         

   

You've got those documents, you go in for your meeting, and then you actually sit down and you have the conversation with your lender or your specialist at that time, and say, "Listen, this is my first time buying a home," maybe do some research, right?

And watch your videos to see what kind of questions [00:01:00] are good to ask your lender and specialist so they're prepared.             

I feel like the best clients that I come across are the ones who are mostly informed themselves.

Mortgage pre-approval

So you go into the meeting, you bring your paperwork with you, and then the lender will sit down with you and instruct the process, which is what we call our pre-approval application.

So they will sit down with you, go through the pre-approval, they'll ask a question regarding your income, your assets, your liabilities.

They'll go over your credit with you.

And they'll come out with roughly an amount that you guys can afford, which is within your budget.    

Now, an approval amount and a budget amount is [00:01:30] totally different things.

You could approve for a lot higher, but it might not fit your personal budget, right?

So some people have our own personal budget in mind that they don't want to go over a certain monthly payment.

I would say kind of decide that before you go into your initial meeting because most lenders, what they do is they'll qualify you for the maximum, especially in the initial stage, because they have no idea what's going to be on the market when you go out.

Mujtaba Syed:                  

Pre-approvals usually are good for about 90 days. But the rate hold that we can do, so let's say there's a really good rate hold, we can hold that for four months.

But even though let's say your [00:02:00] pre-approval has expired in 90 days, you can come back and see your lender again, and we can extend that again for another 90 days, as long as the situation hasn't changed.

Making an offer on a home

So let's say you find that perfect home, let's say you find a homeless that's for $400,000, you write an offer on it saying you're willing to pay 390,000, the offer gets accepted by the seller at 390,000.

They'll give you a certain time period, what we call a "condition of finance."

Actual mortgage approval

They'll give you five to 10 business days depending on the seller to get your financing in order or get your financing approved.              

Once that day starts, the clock [00:02:30] actually starts ticking from that time, and you have that certain time period now to go ahead and get an approval.

That's the reason why I really stress to my clients getting a pre-approval prior to that, because now everything's already in place. Now all you have to do is to get the contract, provide it to the lender, now we can actually approve you and the property at the same time.

We get that sent off, you should gain approval within 24 to 48 hours.

And then from there, you can go ahead, do the inspection that you need to do, come into the bank, sign paperwork, meet with your lawyers, and then you just move in.

So [00:03:00] it's actually not that difficult of a process, two or three steps there, but it should be a very seamless, enjoyable process if you've done your homework right in the beginning.

Karl Yeh:                             

So if you want to know more about the actual pre-approval process, we've got a video up here and I'll link it in the description below as well.

How long does a mortgage approval take?

So Mo, once you've selected a home, you've actually gotten your pre-approval, how long does the true mortgage approval take?

Mujtaba Syed:                  

From the time the clients submit documents, or let's say the lenders sumbit documents to the underwriter, which is an individual in the back end of the file that assesses it, [00:03:30] it should only take 24 to about 48 hours maximum.

It shouldn't take longer than that.

Now, there could be some odd situations where there could be system delays or there's a backup or a log that's kind of moving very slowly.

But your lender will be able to tell you that at that time, because they technically have an idea.

But usually, if everything's going smoothly, it should be 24 to 48 hours, no longer than that.

Requirements for a mortgage approval

Karl Yeh:                             

So what are the requirements that somebody has to have in terms of getting the approval?

Mujtaba Syed:                  

So what most lenders look at is called the five C's of credit [00:04:00].

So the five C's of credit are:

  • Character,
  • Capacity,
  • Credit, 
  • Capital, and
  • Collateral

Capacity

Capacity just means, can you afford the home that you're purchasing based on the stress test, based on the amount.

So for that, we will ask you for certain types of documents that you might need depending on your scenario.

If you are an employee, we can ask you a letter of employment, pay stub, direct deposits going into your account, and we can ask you for an annual document as well, T4, your tax returns. If you're self-employed, it can be a very different conversation.

They could be as simple as two-year tax returns or we'd go [00:04:30] for a deeper dive if we can't find the information that we're needing. But the lender will tell you at that time what you need to do.

Credit

And the other thing we'll look at is credit, right? That's another C of the lending process is credit. So we want to make sure that you have good credit to buy a home.

Within Canada, it's a minimum of 600.

So if you have anything lower and 600, unfortunately, you will need to get a co-signer, someone that has a higher threshold of credit to kind of help you.

There's also certain guidelines. For example, let's say higher ratios.

For example, if you want to go for your maximum borrowing amount, you want [00:05:00] your credit to be at least 680 or higher, and that gives you the maximum move available to buy.

If you're less than 680, then your purchasing power is going to be a little bit less based on the threshold. It could go down by a couple of hundred dollars a month. It really just depends. Your lender will discuss that with you at the time of the appointment.

 

Collateral

Another C of purchasing is called collateral, which is now the property in place that we're actually using as collateral.

We want to know that it meets our guidelines, right? Let's say there's no issues with the home. It's not too old. It's not falling apart.

Let's say [00:05:30] if it's a condo, there's no special assessments going on.

All that stuff the bank will look at, because not only are they using their property as collateral, but they're also trying to save you as well.

As a homeowner, you don't want to get stuck with something that you, unfortunately, did not know and now you're stuck paying that mortgage for 25 years, and let's say the value's not there or there's a major issue with the home, right?

So that's the first three C's of credit.

Character

We look at a character as well.

So character, what we explain to our clients is, you promise to pay something, which is like your mortgage payment on time, we will assess that [00:06:00] by looking at your credit, your income.

We'll look at all that stuff to see, can you afford to pay, or will you pay what you promise to do?

Capital                  

Capital just means we look at technically what your net worth is, right? S

o let's say your assets minus your liabilities is your net worth. It could be negative, it could be positive.

It just really depends on a lot of different situations.

So if the underwriter or the bank looks at a certain life stage you're in, you're just shorting out for the first time, you might have some student loans, so your capital might be negative or your net worth might be negative. It's not a big deal if it fits perfectly [00:06:30] with your life stage.

But now, the scenario is reversed and let's say you're 60, 65 and you have negative net worth, now the bank might think or look harder and say, "What happened here?

You really haven't showed any history of borrowing or having any history of saving?"

So they might question that a little bit more.

Karl Yeh:                              So when you talked about credit,

If you do a mortgage approval, does it impact your credit score?

Mujtaba Syed:                  

It's a case-by-case scenario.

So it's very hard to say, right? So if for example let's say you're coming in and you decided, you picked your bank, you've done your research, and say, "This [00:07:00] is my bank, I want to deal with them," and you apply for a pre-approval, it's not going to hurt. Right?

But what happens in more scenarios is clients, unfortunately, go and they shop at multiple places.

And then what happens, it does reduce your score because the credit bureau is just, it's a tool that banks use, right?

So what it says to them is that this person has applied at five or six different places.

They haven't gotten approved for the first four, now going to their fifth, now they're a credit seeker and they haven't gotten approved. So that is what the credit bureau thinks, and it reduces your score by that much.

But in actuality, what [00:07:30] you might be doing is just rate shopping.

But if you are rate shopping, definitely makes sure that the lender is not pulling your bureau.

That's something that you don't need to do at that time.

You can have a rate hold or you can even discuss rates without pulling your bureau so it doesn't affect negatively on your credit bureau.

I would definitely not recommend shopping with five or six different lenders just for rates, right? That would definitely impact your score.

But it also depends on specific lenders, how they report to their credit bureau.

If you can show up as a soft hit, which is an inquiry, or a hard hit, which is an actual real [00:08:00] live application.

Ask that to your lender as well to see how they report to their credit bureau.

Karl Yeh:                             

And one more thing in terms of talking to your lender,

What are some of the questions you probably want to ask when you're actually going out and finding a lender?

Mujtaba Syed:                  

The biggest question I feel a lot of clients don't ask is go into the nitty gritty of the terms and conditions of a mortgage.

Not every mortgage is built the same. There are certain aspects that let's say are built into the mortgage where you have some certain stipulations, but you also have certain benefits built into a mortgage.                 

Say you want to prepay a certain amount, and let's say [00:08:30] this mortgage that you're getting from a specific lender doesn't let you prepay to the maximum amount that you are willing to do.

You would want to discuss that with them beforehand, and say, "I want to prepay 20% of my original mortgage balance every year. Can I do that?" And they might come back to you and say, "10%, that's the maximum you can do. Anything over that now is ... you're going to be penalized."

So now it doesn't fit your budgeting and your criteria, I would actually go and speak to a lender that actually fits.

Mortgage cash account

 Another really good one is something called a mortgage cash account, which I think is [00:09:00] amazing, right?

So what happens is, anytime you put large sums of down payment which is above your normal mortgage payment, let's say your lump sum payments.

It goes, actually reduces your mortgage by that amount, but also sits in something called a mortgage cash account.

So let's say in the future you have an emergency or you have a need for that fund, you can actually go back into the bank and actually take that money out.

You don't have to re-qualify for that, which is a great incentive tag which is built into the mortgage. A lot of people would not realize that if they didn't actually go into the nitty gritty in terms, right?

So definitely find [00:09:30] out, there's always more than just a rate that is attached to the mortgage.

Terms and conditions are really, really a big part of it, because at the end of the day, that's going to impact you more than let's say a 0.1 difference between lender A or lender B, right?

So a 0.1 difference to me does not make or break, but the terms and conditions could be a make and break for clients.

Question of the Day

So the question of the day I have for you is:

How was your experience with the mortgage approval process? And do you have any tips?

Let us know in the comment section below.                            

And if you want to know more about the [00:10:00] mortgage approval process, watch this video playlist here, as well as our other videos on home financing, which you can see here. Don't forget to subscribe to keep hearing from the experts, and we'll see you in our next video.

 

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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