Tips to avoid last-minute snafus
In the mortgage business, a promise is a promise,
but with some caveats if you break that promise.
You can't hold anyone to anything, especially
in real estate transactions, without written words. By the same
token, if you have written pre-approval from your lender, you should
be able to proceed with your closing with confidence.
A complete review of closing costs is essential.
They include: agent fees, lawyer fees, adjustments in taxes, adjustments
in fuel (if there is a full tank on closing, the buyer pays for
it), deed transfer taxes and deed search costs. These expenses could
be overwhelming, especially if you don't have the funds on closing
So what can consumers do to minimize costs during
closing? Follow these tips to get you through.
1. Be honest. Tell
your lender about any weird conditions you meet or unusual circumstances
in your situation when you apply for your loan. Sometimes what you
put on the application doesn't tell the whole story. You may get
pre-qualified based on a cursory credit check and review of your
But when the lender starts investigating your
loan, anything odd that you didn't mention upfront could lead to
changes in your loan terms.
If you're buying a condominium, for instance,
and the lender finds out that most of the units in the building
are rentals rather than owner-occupied, you could end up having
to pay more for your loan.
Other things that can cause problems:
- Changing jobs. Get a letter stating you've
completed the probation period for a new job, provided it's in
the same line of work as your previous job.
- Self-employment. As long as you have a decent
credit rating, you can get into a home with 15 percent down. You'll
have to provide your notice of assessment from the Canada Revenue
Agency as proof of your income.
- When you apply for loans or credit cards,
it affects your credit rating -- so limit the number of inquiries
to two a year.
2. Don't misrepresent your credit, income
or property value. While revealing credit
blemishes can be embarrassing, it's the only way to ensure you get
an accurate mortgage quote. Your lender may not find something in
the initial credit check because that check may be less thorough
than the secondary one that comes later.
If you are pre-qualified versus pre-approved,
you should pay attention. A pre-approved confirmation gives the
bank a chance to get its homework done upfront and give you a more
But chances are those late credit card payments
or that past bankruptcy will be discovered. Rather than have your
loan price adjusted a week or two before closing because of that,
why not share all your information now and get an accurate price
to begin with?
The same holds true for income and property
value. The lender will check with your employer to find out if you
make what you say you do. If there's a big discrepancy, your debt-to-income
ratio could be higher than initially thought, and your loan may
be adjusted to reflect that.
"It's important for the broker to get as
much documentation upfront," says Jonathan Askew, of The Mortgage
Store in London, Ont. "Then all those little idiosyncrasies
that might crop up would be taken care of. You can just go out and
buy a house now that you have taken care of the down payment and
employment (documentation), which are the two biggies."
3. Find out how long your rate lock is
good for and whether it will extend long enough to get you through
closing. It usually extends from 90 to
120 days, which allows plenty of time to shop for a home.
"The bank can turn around and say, 'We
locked you in at 5 percent for five years, but in the meantime it
has moved up to 6 percent,'" says David Calver, of Mortgage
Intelligence, in London, Ont. "But banks tend to be fair. If
it's in reasonable time within closing, they can extend that period
a wee bit."
It's important to keep in mind that a rate-lock
agreement does not unconditionally guarantee your terms. If you
didn't follow tips one and two, you could end up paying a higher
rate than shown on your agreement. The lender would justify the
change by saying you overstated your income, your house isn't worth
what you said it was, etc., and would be completely within its bounds.
4. Keep paying your old loan
until you close the new one. A lender may tell you that once
you apply for your new loan, you can stop paying the old one. That
is wrong! If you don't keep current on the old loan, the old lender
may report you to the credit bureaus as being late on your payments.
If it takes a long time to close, you could end up
with a 30-day or 60-day late payment blemish on your record.
5. Canadian law requires lenders
to provide a disclosure form to borrowers. This document
is an estimate of what closing costs the borrower will have to pay.
The Realtor, as part of her service, provides this form or you can
ask for one.
Lenders overestimate and err on the side of caution.
If the actual costs turn out to be higher, the form is redone and
new copies are made for signing.
While there's no penalty for understating costs on
the document, reputable lenders and brokers will try to give people
an accurate assessment of their final bill. Borrowers who see a
big difference between the estimated and actual costs should ask
for an explanation.
6. Be skeptical of any changes
in terms after you get your letter of commitment. Lenders
often give borrowers conditional approvals after an initial review
and credit check. But terms presented on those forms can change
as a result of what was discussed in tips one and two.
Much closer to closing day, lenders provide borrowers
with written letters of commitment that spell out terms more accurately.
That's because most of the underwriting steps and other pre-closing
activities are complete at that point. If your lender tries to change
things between the issuance of that letter and closing day, something
may be wrong. "The house may not be worth what the seller says
it is, it could be anything," says Robert Linney, communications
director for the Canadian Real Estate Association.
7. Don't spend every last penny on a home
or loan. This is good advice no matter
what, but it can also protect you from unforeseen changes in your
loan terms. There are legitimate reasons why you may have to come
up with several hundred or a couple thousand extra dollars in fees
to close. If you don't have that kind of money sitting around, you
could lose the home you're trying to buy.
8. Don't be afraid to walk
away. Sure, you might lose what you think is the perfect
house. But if you agree to pay an artificially inflated interest
rate, your finances will suffer greatly. On a $200,000, 30-year
mortgage, a one-half of a percentage point increase in the interest
rate to 7.75 percent from 7.25 percent boosts the monthly payment
by $68 to $1,433. The overall interest bill rises by almost $25,000
to $315,817. That's some expensive linoleum.
If you took all these steps and feel you were ripped
off anyway, experts say you may be able to sue in civil court to
recover any overcharges. But the cost of litigation could easily
exceed the amount of any judgment. And remember, rate-lock agreements,
conditional approvals and the like do not guarantee that you'll
receive those terms.
That said, experts recommend you complain to anyone
who will listen. Talking to someone at your province or territory's
ministry of consumer affairs, or counterpart government body, is
a good place to start.
Melanie Chambers is
a writer in London, Ont.