House Rich, Cash Rich: You Can Have it All - Part 3
Eric Putnam
Burlington Post
August 2009
Dreaming of your own home? By doing a few smart things now, you can be house rich and cash rich.
Part 3: Pre-approved Mortgage Boosts Chances of Closing the Deal
Lili and Amit fell in love with a townhouse. Their real estate agent referred them to a mortgage broker and they rushed over to arrange financing for their dream home. They were brokenhearted to learn they did not qualify for a mortgage large enough to purchase the home.
You can save yourself from this kind of disappointment by arranging for a pre-approved mortgage before house hunting. It’s free and you’re under no obligation to take the mortgage. Along with guiding you toward an affordable price range, a pre-approved mortgage also increases your chances of securing the home you want by demonstrating to sellers that you are a serious buyer, enabling you to confidently negotiate price within a known budget and speeding the sale process.
Keep in mind that being pre-approved for a mortgage is different from being pre-qualified for a mortgage. The latter simply means a lender has estimated the mortgage amount for which you are likely to qualify. Being pre-approved for a mortgage means you have a commitment from a lender for a loan amount, rate of interest and monthly mortgage payments. This written confirmation is typically guaranteed for two to four months. It is, however, subject to an appraisal of the property once a vendor accepts your offer to purchase. This ensures the mortgage lender, and the mortgage insurer, if one is involved, are comfortable with the price paid for the property.
To secure a pre-approved mortgage, you would contact a mortgage broker or a mortgage specialist at a financial institution and discuss your goals, your financial situation and the options available to you. You would complete an application and provide information such as your employment, income, assets, liabilities and down payment. The lender will also ask permission to obtain your credit profile from the credit reporting agencies.
If you have a good credit profile and can provide a down payment of at least 20% of the purchase price of a home, you will likely qualify for a conventional mortgage. If you can’t provide a 20% down payment or your credit profile has certain weaknesses, then you will likely need a high-ratio mortgage, which requires mortgage insurance. This protects the lender in the event that you default on your mortgage. The lender pays an insurance premium for this and the cost is passed along to you. The amount of the premium would usually be included in your monthly mortgage payments.
If you’re having trouble securing a down payment, be cautious about asking a family member or friend to co-sign the mortgage. While you may have the best intentions of making monthly payments, in the event that you can’t, this person could end up being financially responsible for your home. Rather than putting someone in that position, speak with a qualified financial counsellor. An experienced professional can help you find ways to increase savings or strengthen your credit profile so you can assume responsibility for your own home purchase. What a feeling when you can proudly say “this is my home – and I paid for it!”
Eric Putnam is a senior advisor with BDO New Beginnings (www.bdonewbeginnings.ca) and Joyce Brown is a counsellor with BDO Dunwoody Limited (www.debtworries.ca). Both help individuals resolve their financial problems. You can reach Eric at 1 (866) 926-4700 or eputnam@bdo.ca and Joyce at (905) 524-1008 or jbrown@bdo.ca.
