Why do mortgage pre-approval numbers keep changing?
From a broker’s perspective, trying to nail down an upper price point for clients is a little like (aging myself here) the sliding puzzles that were around when I was young.
I had a conversation with a young couple recently who were frustrated with a broker they were working with. They said every time they spoke with the broker their numbers seemed to change.
I explained a bit about how we calculate our pre-qualifications / pre-approvals and told them their broker is being very thorough to make sure they don’t end up writing a price point they won’t qualify for. I showed them how their broker is doing an amazing job of making sure they are set up for success.
Sometimes it gets frustrating on both ends being as it feels like the goal posts move faster than clients can find a suitable home to write an offer on. Having a rate hold in place helps eliminate part of this uncertainty.
Each mortgage application is slightly different. Each lender is slightly different. Clients may have T4 income or self-employed income, as well as other sources, including things like Child Tax (credit) income, pensions, interest or dividend income, RRIF payments, and co-borrower income.
Likewise, down payments come from different sources:
• Proceeds of sale from another property
• RRSP (First Time Home Buyer withdrawals)
• Gifts from family
• First Time Home Buyer’s Incentive Program
• Borrowed sources (flex down mortgages)
And, of course, the “stress test” comes into play.
If you don’t know about the stress test, the short version is that we have to qualify your mortgage application at either your contract rate plus two per cent or the Bank of Canada benchmark rate, whichever is higher. The contract rate means the actual rate you will be approved at.
This calculation was a lot easier when fixed rates were below 3.25 per cent as we could use the Benchmark rate of 5.25 per cent and be certain of our numbers.
Right now most lenders have 4.89 per cent (plus or minus a little) available for a five year fixed rate on an insured mortgage. So I would run your calculations at 6.89 per cent and have a rate hold in place for you to be certain of your price point.
Now we move onto the lender end of things. As an example, some lenders will use the full amount of CTC income. Others will only use a percentage. Some lenders will accept down payment from the First Time Home Buyer’s Incentive program while others won’t.
Some lenders will finance properties with wood foundations, while others won’t.
You get the picture here – the calculations that work with one lender to maximize your price point may not work with the lender that will actually finance the home you’ve written your offer on.
My best advice if you are venturing into the world of home ownership is to take your time and do your homework.
One of my columns from November talks about the challenges you can face if you don’t have your ducks in a row).
In many markets we need to help you maximize your mortgage amount just to get you into the market, so it will likely be several conversations before you have an exact number nailed down. Be patient with the process and learn as much as you can before you write an offer. The time invested upfront will help to make the process a smoother one for you.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.