Recent changes to Canada’s mortgage rules mean lenders are now asking for more documentation than ever when approving mortgages. What does that mean for home buyers? Toronto mortgage expert Jodie Alich outlines the documentation home buyers will need when applying for a mortgage in Canada.
“You always had to supply documentation when you got a mortgage but the new requirements may mean providing more than borrowers are used to,” says Alich. “One reason for that is lenders are doing more due diligence since they may soon be partially accountable for mortgage defaults.”
The increased documentation is required whether the mortgage is for an individual or a business, as well as for pre-approvals for a purchase. More documentation is also being requested when refinancing, switching lenders or obtaining a second mortgage.
Here’s a list of what you can expect to provide for documentation.
The law requires lenders to see identification so they are sure you’re who you say you are. You’ll need to provide one piece of government-issued photo identification (excluding your health card) as well as a second piece of identification.
Your realtor will provide you with both the purchase agreement and the MLS listing to verify the purchase price of the home you’re planning to buy. If the purchase is a private sale, you’ll almost always need an appraisal as well.
Refinancing, Switching and Second Mortgages
You will need a current mortgage statement for the property. If you’re dong an equity takeout, you won’t have a mortgage on the home and will not need to provide this.
You’ll need your property tax statement showing the taxes are up-to-date. And if they’re not, you’ll need to pay them in full before the closing date. Note that alternate lenders may allow outstanding property taxes to be paid out at the time of closing.
If you’re refinancing or purchasing through a private sale, your lender will almost always require a property appraisal.
Alich warns you not to get an appraisal done ahead of time even if you think you’re going to need one.
“Lenders typically have their own list of approved appraisers. You don’t want to spend money on an appraisal only to find they aren’t on your lender’s list of approved appraisers,” she says.
Down Payment Verification
If you are getting a mortgage to purchase a home, you’ll need down payment verification.
- If your down payment is coming from your savings or chequing account, you’ll also need to provide three months’ history. If a large deposit has been made during that time, you’ll need to verify where it came from. Typically, any large deposit that doesn’t show the source will need to be verified in accordance with Canada’s legislation to prevent money laundering and terrorist activity financing. If you’re printing out your statement for your account, make sure to include the main page that shows your full name and your account number to verify you as the owner.
- If your down payment is coming from investments, mutual funds, tax free savings or RRSPs, you’ll need to show three months’ history from each investment account you are using.
- If your down payment is a gift from an immediate family member (mother, father, sister, brother) you’ll need a letter stating that the money is a gift and is not repayable. You’ll also need to show your bank statement and accompanying documentation to show the funds were deposited to your account. Gifts cannot come from your spouse or common-law partner.
- If you are using borrowed funds for your down payment, you’ll need to show where the funds came from. You’ll also have to show the deposit of those funds into your account. Additionally, any borrowed funds must be worked into your gross debt service (GDS) and total debt service (TDS) and would have to work within those guidelines.
- If you are selling your current home and using the proceeds as a down payment, you’ll need to have a mortgage statement if the property is still mortgaged. You’ll also need a firm sales agreement stating what the property sold for.
If you have an existing home, you’ll need proof of insurance. This is not loan insurance but property insurance for fire, damage, and theft. If you are purchasing a new home, you’ll be required to have insurance in place for the new home at time of closing.
At time of closing, you will also need a void cheque or a pre-authorized debit form stamped by your bank. Your bank will supply you with the debit form. Be sure it’s officially stamped by them and signed by you if applicable.
If you don’t have a lawyer, your realtor may recommend one. A few lenders may have their own approved solicitor list. Alich always recommends three solicitors to her clients and suggests they call each of them and go with the best price.
Salaried and Hourly Employees
Whether you’re on salary or paid by the hour, you will need an employment letter stating your job title, guaranteed weekly hours, rate of pay and length of employment. You should also provide two recent pay stubs. You’ll also need last year’s notice of Assessment from Revenue Canada to confirm there are no taxes owing. Any taxes owing will need to be paid before closing. Some lenders may also requestT4 slips.
Self Employment Income
You will need verification of your registered business. Plan to provide your business licence and the last three years of both your tax returns and your notices of assessment which clearly show your net income and taxes owing (if any). Plan also to provide bank statements for 3-6 months showing deposits to your business account. Some lenders may also require invoices to match the deposits on the statements.
If your income source is pension income, plan to provide your T4A(OAS), T4A(CPP) or any other pension information slips.
Some lenders will accept Ontario Disability Support Program (ODSP) as an income source for a mortgage. Some also will allow you to use income from the Canada Child Tax Benefit (CCTB) program and child support payments provided your child(ren) will not turn 18 before the end of the mortgage term. As an example, money you receive for a 15-year-old would not qualify for a 5-year term since the child would be 18 before you reached the end of five years. Rental income can be used but you’ll need to show a lease agreement plus one tax return showing your rental income.
All borrowers should be prepared to pay for an appraisal even though it is not always required.
You may need to show proof that an errant debt showing on your collection report has been paid.
You may need a copy of the building inspection if a property needs work or is showing on a listing as a handyman special, as needing TLC, is under power of sale or is being sold “as is”. The purchase of a rural property may require proof of potable water and in some cases, a septic inspection as well.
You may be able to remedy debt ratios that are too high, providing you show documentation when doing so. For example, one client negotiated his $500/month car payment down to $400/month. He provided proof of this change and was then able to qualify for the mortgage.
Co-signers are treated as borrowers and are required to provide the same documentation as the home buyer. In addition, anyone who is going to be on the title will need to produce the same documentation. While a spouse sometimes chooses not to be on the title of a property, he/she will still be required to sign spousal consent on the mortgage.
Some Final Advice
If you’re considering buying or refinancing in the future, start collecting your documentation now. You don’t want any unnecessary delays because you’re trying to gather the needed documentation.
Most people misplace their notices of assessment. Start a file and keep these documents. If you don’t keep hard copies, set up an account at the Canada Revenue Agency (CRA) website so that you can have the documentation at your fingertips.
All lenders, even private lenders, require that all documentation be in place 10 business days prior to closing.
“Be prepared and the process will go smoothly,” says Alich. “And remember, your lender reserves the right to ask for additional documentation.”
As Principal Broker of Mortgage Experience, Jodie Alich focuses on providing her clients with a stress-free mortgage and sound advice. In addition, she develops and delivers continuing education courses in both the mortgage and real estate industries. To contact Jodie directly, visit Mortgage Experience.
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