Lenders are being careful. Recent interest rate hikes are leading to ongoing policy changes and belt tightening by financial institutions.
  
 Consumers are having a hard time keeping up. And although veteran home buyers are more familiar with the process of buying a home than their less experienced cohorts, they often develop certain assumptions because of that comfort level.
 
 This is the danger zone.

For example, we assume if our bank says sure go ahead, it means we are preapproved.
 
 We take it for granted that the ability to port our mortgage means that we can do so if we wish.
 
 We believe that once a mortgage commitment is signed, the lender is locked into providing the mortgage.
  
 The purpose of this article is to dispel some of those assumptions. The truth is, even the most diligent of home buyers can find themselves in a bad situation.
 
 Even with financial documents firmly in the hands of mortgage professionals and a prequalification in place, some house hunters may be surprised by a mortgage commitment that never appears.

 In the current buying environment, it is becoming more common for a home sold conditional on financing to be unsuccessful in making it through the conditional period. This in turn is making sellers more cautious. No home seller wants to find themselves on the wrong end of a deal gone bad.
  
 However, equipped with the right information and sufficient lead time, buyers can still enter the offer process with confidence.
  
 Let’s take a look at a few places where things can go wrong so you can shore up your personal protection when it comes to financing your next home.*
  
#1 Preapproval or Prequalification
  
 Before you visit the first home in your search, it’s best to begin the process with a clear understanding of how much house you can afford.

 Without this information, you could find yourself in a situation where you believed the financing was available – only to find out after you make an offer that it was not.
  
 The best way to protect yourself is to secure a written prequalification from your lender. At a minimum this would stipulate the amount of your mortgage and down payment, your interest rate, payment amount, payment frequency, term of the mortgage, and amortization period (eg. 25 or 30 years).
 
We are often asked about the difference between a preapproval and prequalification.

 A preapproval is a more casual green light from your bank that is usually not supported by documents validating income, taxes, and so on. You might be asked questions about your income and your debt, and that’s about all.
  
 A prequalification, by contrast, is a formal written approval from your lender. In this case, financial documents are sent to your bank or mortgage broker for review. Income information, tax returns, bank statements, and a letter of employment, among other things.
  
 With a prequalification, you know how much you can feel comfortable spending on your home. Importantly, it will also give you the confidence to know that your lender has approved your financial resources to buy the home.

 When your mortgage advisor requests documents from you, we recommend sending them. The process of sorting through bank statements and tax returns to get a prequalification is tedious, but it is your best protection in securing the home you want.
  
#2 The Mortgage Commitment
  
 A mortgage commitment letter outlines the specifics of the mortgage your lender is offering. Often it will include the property address as well.
  
 To protect our clients, we usually recommend adding a financing condition to an offer to get you through to the commitment stage. This allows time to provide the property address to your financial institution and ensure the bank approves the use of mortgage funds for that specific property.

 Once receiving a mortgage commitment from your lender, you can feel confident the mortgage financing is in place for that home. Assuming all else is fine with the financing, like for example the appraisal, then this is usually the step that would allow you to remove the financing condition.
  
 On the other hand, if your lender does not approve the purchase of the home you have selected (even if you already have a prequalification in place), you will not be able to obtain a mortgage for that property.
  
 This makes the financing condition critically important. It provides a protective escape hatch that allows you time to go through the process with your bank and ensure all is well before a deal becomes firm.
  
#3 The Appraisal
  
 Why might a financial institution decline your mortgage even after prequalification? There are many reasons, but a common cause recently is a low appraisal.

 Sometimes a lender will require an appraisal before approving your mortgage. This step is designed to ensure you have not overpaid for the home.
  
 Given how quickly prices have corrected in the real estate market over the past several months, lenders are being particularly careful at the appraisal stage.
  
If a financial institution appraises the home lower than what you offered, you may have a problem. It could mean having to find a larger down payment to make up the difference. Or, in the worse case, you may have to walk away from the property entirely.

 We recommend following the steps right up to mortgage commitment carefully and diligently. Ensure your mortgage broker has all the requested documents and check in with them periodically to verify they have what they need.
  
 Remember, your financing condition is there to protect you. Only waive your condition once you are 100% satisfied that your mortgage is firmly in place.
 
 And get it in writing. 
#4 Debt Ratios
  
 Market conditions over the past few months have made lenders much more selective. This is because higher interest rates typically result in larger monthly payments.
  
 The worry for a bank is, can my client afford the higher payments?
  
 Most consumers are not earning raises alongside the interest rate increases, and this is throwing off debt ratios for home buyers. Some are finding it more difficult to get mortgage financing at all, while others are faced with a much lower budget than anticipated.
What is a debt ratio?
  
 Put simply, it’s a comparison between how much a person earns and how much debt they have. If income remains stable but the cost of buying goes up in the form of higher interest rates, debt ratios are negatively impacted. As a result, it may be more difficult to obtain a mortgage.
  
 Assuming your debt ratio remains stable following the acceptance of your mortgage terms and everything else is in place, you should have no trouble making it through to closing.
 
 However, sometimes home buyers will put large purchases on credit before closing, not realizing the damage they might be doing to their debt ratios. Perhaps new furniture for the new home is purchased, or maybe a new car.

 This added debt results in a less attractive debt ratio because you have higher debt relative to your unchanged income. If a debt ratio takes a hit between mortgage commitment and closing, it opens the door for a financial institution to pull mortgage funding entirely.
  
 For most home buyers, this spells disaster.
 
 We recommend our buyer clients exercise financial restraint in this very delicate period between mortgage commitment and closing.
  
#5 Penalties & Porting Your Mortgage
  
 Think back to when you signed your mortgage papers on your current home. Didn’t it feel good to know that you had the freedom to port your mortgage over to the new place if you wanted?

 A portable mortgage is great. Typically, you would keep your interest rate, the payments usually stay the same, and if life requires you to sell and move before the mortgage term is up, you have the freedom to do so.
  
 Be careful, though. Lenders may require re-approval before they allow you to port your mortgage. Or they may charge you a fee to do so. Or both.
 
 Worse, if your current interest rate is lower than a new rate you might obtain, you may find your lender declining porting that mortgage entirely.

 If you are planning to sell and expect to port your mortgage to the new home, exercise caution. Even if your current mortgage documents explicity state that you have the ability to port your mortgage, you could still be at risk of being declined.
 
 This is true even if your credit is excellent and your income and employment has been stable.
  
 We recommend obtaining your new approval in writing before fully committing to the new house. If your lender advises you a written preapproval is not possible for that port, be wary. This could mean they are getting ready to decline your application.

 Adding a financial condition to your offer will be important to your peace of mind particularly in this scenario. We recommend waiting until you have the new mortgage commitment in place, in writing, before removing the financing condition.
  
 Otherwise, you could find yourself in a position where you are firmly committed to a sale without knowing where your mortgage is going to come from, or knowing if you have any mortgage at all.
  
 In the current market conditions, interest rates are higher than they have been for many years. It’s making financial institutions more guarded about who qualifies for a mortgage. Your best protection is to ensure you have confirmations in writing every step of the way.
  
 If you are not yet working with a REALTOR® and are looking for guidance in how to plan your next home purchase, reach out to us today.***
  
*Disclaimer: We are not mortgage brokers nor are we financial advisors. We do not hold a license to dispense financial guidance, mortgage information, or mortgage advice, and do not aim to perform that function here. Rather, the information provided in this article is designed to simplify the home buying process, and provide guidance to protect and support our clients and prospective clients. For detailed guidance and advice on your specific mortgage situation, please contact your trusted mortgage advisor or financial institution.

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