Vancouver mortgage expert Malcolm “Mac” Laird brings some clarity to the current mortgage application and approval process in this guest post.
Pre-Approval vs. Rate Hold
There is always much confusion between the terms "Pre-Approval" and "Rate Hold".
A “Rate Hold” is just that, a hold on an interest rate for a period of time. It is NOT an approval for anything.
A "Pre-Approval" requires all of the diligence of an actual mortgage approval including the collection of employment letters, Notices of Assessment, proof of down payment, statement of assets and liabilities, credit report, and any other documents a lender may request. Unless these have been requested and supplied AND accepted by the lender, you have a "Rate Hold", not a Pre-Approval.
With the recent mortgage financing changes, ALL prospective buyers who wish to purchase a property MUST be pre-approved. Otherwise, everyone involved -- purchaser, seller, Realtors – is wasting time.
Note that once you have a Pre-Approval in place, this does NOT mean that your mortgage is automatically approved. When purchasing a property there are two sides to the mortgage "approval" - the buyer and the property. Even though the buyer may meet all of the qualifications to purchase the property, the property itself needs to meet the lender's criteria. Therefore, usually approval of the property requires an appraisal.
An appraisal cannot be done – nor can the lender then review and accept the property – until the buyer has an accepted offer to purchase and the mortgage application has been sent to the lender for Final Approval of mortgage financing.
Debt Servicing (GDS/TDS)
Debt servicing is how the lender looks at your monthly payment obligations for loans, credit cards, and payments related to your property/housing as compared to your monthly income. GDS is your Gross Debt Service Ratio. This includes all monthly payments specifically due to housing as a percentage of your allowable gross monthly income (usually 32%). TDS is your Total Debt Service Ratio. This includes ALL monthly debt payments (loans, credit cards, car lease payments) plus your housing expenses. Usually this ratio is set around 40% of allowable gross monthly income.
Therefore, when we go to a traditional lender and want to access some of the equity (savings) in a home or purchase a new home, we’re bound by these ratios.
Loan to Value (LTV)
LTV, or Loan to Value, is simply that - the value of the mortgage loan as compared to the value of the property you are financing. For instance, if you have a home worth $700,000 and a mortgage for $400,000, your loan to value is 57% - 400,000/700,000. Some general
LTV guidelines that have been established by lenders include:
- any more than 80% LTV requires mortgage insurance from either CMHC or Genworth Financial.
- no more that 65% LTV can be in a Line of Credit.
Remember, LTV is established by appraised value or purchase price. It is not a guess at what the value is.
High ratio mortgages (above 80% LTV) must be insured through CMHC (Canada Mortgage and Housing Corporation) or Genworth Financial Canada. This is not to be confused with life (sometimes incorrectly labelled "Mortgage Insurance"), disability, or job loss insurance.
All high ratio mortgages must be “stress tested” at the current Bank of Canada Rate (currently 4.64%). That is, the borrower must qualify at a rate of 4.64%, regardless of his/her actual mortgage rate.
The insurance premium is calculated as a percentage of the mortgage amount, depending on the loan to value, and may be added to the mortgage amount. I can discuss this with you.
Down payment requirements vary greatly from lender to lender, insurer to insurer, conventional to insured, gifted to savings, etc.
Mortgage rules and guidelines change constantly. Free to email or call me so we can discuss your particular situation and how to best navigate the current mortgage market.
Malcolm "Mac" Laird, B.A., M.A., AMP Mortgage Consultant/Strategist
VERICO Nova Financial Services Inc.
Thanks, Mac. I can highly recommend Mac if you’re seeking a mortgage broker. The many clients I’ve sent his way quickly become his clients for life.