10 mortgage financing hiccups and how to avoid them

Buying a home can feel like a mammoth undertaking, from getting a mortgage pre-approval to shopping for a property and all that accompanies a successful bid. There can be a steep learning curve for first-time homebuyers, no matter how prepared they are. But even the most seasoned homeowners can be surprised by financing hiccups leading up to closing day.

We asked a mortgage broker and real estate lawyer about minor and major mistakes people make when securing financing for a new home. The professionals outlined the top 10 potential pitfalls you should avoid. Here is what not to do.

1. Accept your pre-approval as a promise rather than an estimate

Getting a mortgage pre-approval can help you estimate an affordable purchase price. Usually, the mortgage agent or broker will require personal information, including income, estimated down payment, and monthly obligations, such as student or car loans. They will then calculate your debt-servicing ratios and verify your credit score using the information you offer. The mortgage agent or broker won’t scrutinize your supporting documentation at this stage, but it is crucial to provide an accurate account of your finances. Once they run the numbers, you will get a pre-approval certificate with a rate hold guarantee for up to 120 days (about four months).

In today’s hot housing market, buyers throw caution to the wind and place offers without any conditions (e.g., home inspections or financing). Doing so can be risky. A mortgage pre-approval is not a binding agreement, nor is it a guarantee. If, for instance, your financing were to fall through after you put an offer on a home with no conditions, the seller could sue you.

While many buyers purchase homes without financing conditions, they open themselves to potential risks. Remember, a pre-approval is not an approval.

2. Move money or close bank accounts

When you move through the mortgage approval process, your agent or broker will require lots of documentation, including bank statements going back several months. It is vital to keep all your bank accounts open leading up to a home purchase to ensure you can prove where the money originates.

Accepting large deposits or moving money around can create a complex puzzle for your mortgage lender’s team. They will need concrete proof of each transaction, including any financial gifts or inheritance money. For homebuyers who resort to the bank of mom and dad for down payments, ensure you prepare a mortgage gift letter to verify these assets.

According to Samantha Brookes, CEO and founder of Mortgages of Canada, a mortgage brokerage in Toronto, Ont., some accounts can be more intricate than others.

Brookes recalls a case involving a “susu,” a savings practice popular in African and Caribbean cultures where a defined group of people contribute to a shared savings goal.

“This couple had large sums of money, cash, going into their bank account,” Brookes says. “We had papers all over the floor; everything was colour-coded and numbered. It took us three extra weeks — between the bank and us — to figure out where the money was.”

In some cases, Brookes says homebuyers should anticipate spending more time going back and forth with their mortgage agent or broker. She uses herself as an example.

“Somebody who is self-employed, like me, will have to show proof for everything.”

3. Change or quit your job

Starting a new job might boost your income, but it could also jeopardize your mortgage application. While there is no hard and fast rule for how long you should be at your job before applying for a mortgage, lenders will view your probationary period cautiously.

“If you’re trying to use your overtime, make sure it’s been two years,” says Brookes.

Whether it’s commissions or bonuses, brokers will use your two most recent notices of assessment to get an average of the additional income.

A career change isn’t the only hiccup your employment can cause. Sometimes, people who work for large companies can find it challenging to get employment confirmation — an essential detail in the lender’s due diligence.

For instance, Brookes says large companies like the Toronto Transit Commission (TTC) handle hundreds of employees, and it can be hard to contact the right person there. Issues can also arise with teachers in the summer months. Who do you call when the school board is closed, for instance?

4. Overlook your credit score

It’s essential to keep tabs on your credit report to flag errors and track your progress. A good credit score can help you access low mortgage rates. On the other hand, bad credit, such as missed payments, can stay on your credit report for six years and hinder your home buying efforts. If you’ve made mistakes, it will take time to improve your credit.

Even if you are good with your money, you can run into problems. Newlyweds in Ottawa encountered this issue when they were denied a mortgage approval last August because of a credit history mix-up with a person in a different province with nearly the same name who had poor credit. The couple has been fighting for more than five months to correct the error. In that time, between August 2021 and January 2022, detached home prices jumped 14% in the area.

5. Pay more than a property is worth

Despite what you might have heard about bidding wars, paying over the asking price can backfire. Brookes gives an example.

“You pay $250,000 over asking, the appraisal comes in, and the value is not there.”

Despite pre-qualifying for a certain amount of financing, the lender won’t necessarily grant you that money. The lender bases your mortgage on the home’s appraised value. An appraiser will determine this number by factoring in specific criteria, including the home’s condition, recent sales in the area, and current market conditions.

“Now, if you’ve signed off on this [without conditions], you have to come up with a difference between the purchase price and the appraised value,” she says. “If you purchased the home for a million dollars, and your appraised value is $900,000, you have to come up with an additional $100,000, plus your closing costs.”

If you can’t front the money, you could lose your deposit.

6. Meddle with your finances

Don’t make any big financial decisions apart from your home purchase during the lead-up to closing day. Brookes has seen it all, from a father who co-signed for his daughter’s car loan to a woman who financed a bunch of furniture to fill her new house.

Taking on more debt can throw off your Gross Debt Services (GDS) and your Total Debt Services (TDS) ratios, which can’t exceed a certain threshold. If your ratios are too high, your mortgage application can be denied.

“Don’t touch your money,” Brookes advises. “Have more than what you need.”

7. Purchase an uninsurable home

Home insurance is optional in Canada — unless you want a mortgage. Most mortgage lenders require homeowners to purchase a policy to secure financing. The good news is that, in most cases, getting coverage is as simple as comparing home insurance rates online.

“A couple of times, we’ve run into an issue where the home cannot be insured,” Brookes says. “We had a property in an older townhome complex, and the townhouses had foundational issues in the neighbourhood. The insurer knew about the issues and would not insure.”

If a home was a former Grow Op or sits on a floodplain, you may find it challenging to get insurance. A home inspection can detect and protect you against these issues if you include the condition in your purchase offer.

“You can’t get a mortgage if you can’t get insurance,” Brookes says. “Your deal basically dies right on the table.”

8. Forget about closing costs

Saving enough money for a home down payment is a significant achievement, often worth tens of thousands of dollars. But homebuyers can’t forget about closing costs — the expenses that trickle in before the purchase is finalized, totalling a few thousand dollars more.

“I’ve had it happen where first-time homebuyers were surprised by their closing costs,” says Melissa A. Douglas, barrister and solicitor for Douglas Law Firm in Woodbridge, Ont.

Homebuyers must pay a land transfer tax, lawyer fees and other disbursements, such as title insurance and registration fees. Lenders usually recommend saving 1.5% of the purchase price for closing costs, but people will need more in some cases. In Toronto, for instance, buyers face double the land transfer tax, one municipal and one provincial.

“These are all things that first-time homebuyers would want to ask and inquire about ahead of time, so they can budget accordingly and make sure that they have enough money when it comes time for closing,” says Douglas. “It’s important to know the costs involved ahead of time to save up the extra money or ask for help if needed.”

9. Neglect to account for time constraints

Typically, your real estate lawyer will ask for a bank draft for your down payment funds, which they’ll deposit a few days in advance into the firm’s trust account. On closing day, your lawyer will wait for the lender’s funds before transferring the total amount to the seller.

“Usually, the major banks are pretty good,” says Douglas. “They’ll deposit mortgage funds early in the day provided that we [supplied] all of the signing documents at least a couple of days before closing.” Delays, such as late mortgage instructions, can cause problems.

“We only have until five or six o’clock on the day of closing because we have to work on the bank’s time,” says Douglas. Fridays — being the last business day of the week — and holidays can create additional challenges. Suppose you don’t meet the initial deadline. In that case, you’ll need to ask for an extension, delaying closing for several extra days until the banks, land registry office, and other businesses are open.

Douglas says many B lenders or private lenders are out west, creating an unforeseen issue: time zones.

“It’s all about timing and making sure that the client comes in, in a decent timeframe, like two, three, four days before closing,” says Douglas. “We can get the documents back to the lender to review them, and then they fund early on the day of closing.”

10. Wait until the last minute to finalize documents

If we haven’t already stressed this point enough, it is imperative to have your documents in on time, if not ahead of time. It can affect not only you but potentially the sellers, too.

“It’s a chain reaction,” says Douglas. For instance, delays can hinder the seller from closing another transaction because they rely on that money.

“The people they’re buying from are also waiting. It can be a whole big chain, which has happened before.”

If you have to ask for an extension, the sellers will also have to ask for an extension on their purchase.

“It’s now going to be a chain of fees, and we have to cover their costs for the extension,” says Douglas. “It can be devastating if there’s a long line of people waiting on the money to buy.”

How to ensure a smooth and successful closing day

Your closing day can be a stressful yet exciting time.

Prepare by thoroughly reading all documents and asking questions. Give yourself some wiggle room financially and understand the risks of waiving conditions. Don’t close accounts or move money for several months before purchasing a home and hold off on making big purchases.

Be consistent, transparent, and timely to avoid any nasty financing hiccups.