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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 day.

So what can consumers do to minimize costs during closing? Follow these tips to get you through.

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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 application data.

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 accurate assessment.

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.

-- Posted: Sept. 20, 2004
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