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The Learning Centre:
Mortgages
 

The Money Management Newsletter: Home Ownership
I've applied for a mortgage, what's happening?
You've fallen in love with a house and need a mortgage to complete the purchase of your dream home. Have you ever wondered what happens in the background at the lending institution while you're waiting for your mortgage approval?


If your offer to purchase contains the clause" subject to financing" a lender would normally require from 2 to 5 business days to process the mortgage application. You may receive an provisional O.K within hours, depending on your circumstances, however the lender will still need to verify the information provided and evaluate the property.

This is what the lender is likely to do.

1. Have the property appraised. (depending on the amount borrowed, you may be required to pay this cost) The appraisal is done to assure the lender that the value of the property is sufficient to cover the mortgage in the event that the borrower defaults. The appraisal is NOT a property inspection, nor is it necessarily a market valuation. The report provided by the appraiser is often kept confidential by the lender.
2. Verify the financial information given.
3. Check your credit rating.
4. Issue a formal commitment or approval in writing.

What sort of guidelines are used when the lender assesses your application?

The standard application is subject to the three C's - Character, Capacity and Collateral.

Character: Are you dependable? Do you pay your bills on time? Do you meet monthly loan payments?
Capacity: Is your income stable and sufficient to handle the mortgage payment? Does your gross Debt-Service Ratio come within the lenders guidelines? Do you have other debts and obligations?
Collateral: Does the property offer good security for the loan required? Does it meet the lender's criteria and is it likely to be easily sold? (Most lenders will use an appraiser to determine its value and marketability)

Other considerations are:


1. Location. Is it close to amenities such as schools, shopping, public transportation and recreation?
2. Zoning. Is the area zoned for residential use? Does the zoning protect property values and prevent undesirable change?
3. Price. Is the price comparable to and within the range for the area?
4. Quality of the neighbourhood. Is the neighbourhood stable or improving? Is pride of ownership evident? Is there an ownership mix?
5. Housing unit condition. The actual age of the home may not be important. What is important is the structural and mechanical condition. Has the home been modernized? Is its electrical wiring, plumbing and heating system in good operating order?
6. Size. Does the building and the lot size meet the market requirements for the area? Does the liveable floor area meet market demand?
7. Style. Is the architecture appealing? Does it conform with housing styles in the neighbourhood?
8. Municipal services. Are municipal services in place or planned?

Approving the amount.


Lenders base the maximum mortgage amount on the appraised value or the purchase price, whichever is less and within the lenders own maximum Loan-to-value ratio formula. (this is the relationship between the amount of the loan granted and the value of the property.)

Normally if the loan is more than 75% of the lending value, the mortgage must be insured by CHMC or a private insurer. This type of insurance protects the lender against loss if a mortgagor defaults and the sale proceeds of the house don't cover the outstanding mortgage. In some case the lender may insist that the loan be insured even if the loan-to-value ratio is lower than a 75% benchmark. For example a lender may require CMHC insurance as a condition of the mortgage if the property or borrower is considered a higher risk. Some condominiums, leasehold and rural properties fall into this category. In a competitve mortgage market lenders have been known to bend their rules in order to attract business.

Prior to advancing any funds the lender may also require a check of the property title to ensure that it's clear and unencumbered, request a survey of the property, and obtain a property tax certificate. Rather than going through this process the lender may instead use title insurance to protect the borrower and itself against deficiencies in the property title or unknown encroachments on neighbouring properties.

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