Applying for a mortgage in Ontario involves a variety of steps that can often come as a surprise to those that are purchasing their first home. The mortgage approval process can seem lengthy or complicated if new buyers have not taken the time to understand some of the basics. Before applying for a new mortgage, read below to understand some basics of the process, including information about pre-approvals, mortgage commitments, mortgage obligations, lender profiles and condition fulfillment.
What does it mean to be pre-approved for a mortgage in Ontario?
It is often beneficial to start the pre-approval process before looking for a new home. This allows buyers to understand what amount of money the potential lender will provide based on some basic information, which in turn will help to narrow the list of potential homes that buyers should look at based on affordability. Pre-approvals can lock in a certain interest rate as well, so this can provide peace of mind for buyers when they are in the market for a new home.
Pre-approvals are based on some basic information provided through online forms. While this process does result in a written confirmation from the lender for a mortgage amount and specific interest rate, pre-approvals are not absolute guarantees, nor are they legally binding. Lenders require a formal application that will involve more in-depth employment information, income, credit history, tax statements and other personal and financial information.
Also important for the process is information about the actual property that is being purchased. Lenders will look at the purchase price of the home, but also often require an appraisal to determine if the home merits that price. Unless and until the home is approved, the pre-approval has little value. It is only a first step. A buyer would be wise not to waive or fulfill a financing condition based on a pre-approval.
What is the official Letter of Commitment?
The mortgage approval is not official until a Commitment is received that is signed by the lender. If a mortgage broker is involved, be aware that the mortgage broker’s signature is not enough to make the mortgage approval official.
A mortgage approval letter will have conditions in it that must be met prior to the money being advanced. These conditions should be reviewed to ensure they are able to be fulfilled.
Banks and lenders do not give verbal approvals for mortgages. Lenders and mortgage brokers should always provide applicants with a signed, paper copy of their mortgage approval that was issued by the lender. As a buyer, always insist on obtaining this document. Even after a mortgage commitment is provided, buyers should not waive or fulfill the financing condition.
It is best to only provide a notice of fulfillment of the financing condition once the signed commitment has been sent, the conditions have been reviewed (and they are achievable), and the lender has obtained a satisfactory appraisal of the specific property.
What are my obligations once I have a mortgage?
Mortgages are legally binding contracts where both parties have obligations to fulfill. The house forms part of the mortgage security. The home is valuable to the lender in that the lender can recover some or all of the investment if the borrower fails to pay back the mortgage by selling the security on the open market. Lenders need to know the value of the home is accurate so it can ensure sufficient equity is available in case of default.
Each lender has a set of additional terms that attach to and form part of the mortgage security. These additional terms are called Standard Charge Terms (SCT). There are many obligations placed on a borrower in addition to payment of the mortgage amount, which a borrower may not be thinking about. A borrower would be wise to know which SCT are going to be included in the mortgage and ensure that they are prepared to meet all of the obligations contained therein. This is best accomplished by asking for this information from the mortgage broker or bank directly. Alternatively, most SCT are also available online under their respective numbers. The borrower’s lawyer will provide the SCT at the last moment while signing documents. At that point, even if something is problematic, the buyer will have very little time to find alternative financing.
Are the major banks the only lenders who can provide mortgages?
The major Canadian banks are not the only institutions that provide mortgages. Private lenders and alternative lenders exist that provide financing options for Canadians. This is relevant since more stringent requirements are now required by the major banks. This test requires all Canadians who are applying for a mortgage to qualify at a higher rate than the basic rate offered by a lender. The test does not apply to all lenders as some private lenders are exempt.
Conditional Upon Financing
Unless you are able to self-finance a purchase, it is important to ensure an offer to buy a home is conditional upon financing. If you remove your financing condition prior to being completely satisfied that you are able to meet the requirements of the lender, or before the home is approved by the lender, you risk being unable to obtain satisfactory financing for the purchase and being responsible for a shortfall in the purchase price. Alternative lenders are available to buyers if the major banks are unable to take a mortgage.
If you have any questions regarding mortgage conditions, please contact real estate lawyer Noah Potechin or call him directly at 613-563-6692.