As many of my clients know, the process of receiving a mortgage is not always straight forward and hassle free. It is, for most people, the biggest financial decision of their lifetime and therefore brings a large amount of stress and anxiety. Over my 20 years of experience in the industry, I have encountered and heard of many different mortgage horror stories. Many of these are clients doing what they think are harmless actions that eventually make the mortgage process that much more difficult. For this commentary, I decided to write about actions to be aware of if you are thinking about getting a mortgage in the near future.

The first one, and in the eyes of the lender the most important, is to make sure all outstanding income taxes have been paid. In the event of a bankruptcy, the mortgage company is second in line to receive any funds from the client, behind the Government of Canada. This is an unfortunate scenario for all parties involved but when it comes down to it, banks are in the business of making money and if a client defaults and soon after declares bankruptcy, the first payout is to the CRA to pay off any outstanding income taxes. Because of this, banks will not lend to clients that have outstanding income taxes.

The next one, which is more typical and sometimes unavoidable is large undocumented deposits into the bank account that clients are using for down payment. Banks will usually ask, and request documentation for any large unexplained deposits appearing on the client’s bank statement. If the money is a transfer from another one of the client’s bank accounts, the bank will then ask for 3 months of that account which in some cases has resulted in piles of unnecessary documentation. The reason being that the Bank of Canada implemented guidelines and restrictions to reduce money laundering and un-taxed income (drug money, undocumented server tips, under the table jobs etc.). If documentation is not available, the bank will not accept the down payment.

Finally, it is important not to significantly change one’s current financial situation after applying for a mortgage approval. This could include incurring extra credit card debt, financing/ leasing a car and using a line of credit as a financing tool, are all potential actions that could hurt a client’s ability to qualify for a mortgage. The banks look at two income ratios when qualifying someone for a mortgage. Gross debt servicing – the client’s capability of affording the costs of the new property (mortgage payment, property taxes, heating, and condo fees) based on their income. Total debt servicing – the same as gross debt servicing, however, they also include any other monthly debt obligations. If either of these ratios exceed the allowed percentages the bank will not lend money. This becomes a big problem when, at the start of the file, the client is approved for a mortgage and a few weeks later waives their conditions. The deal is now a legal contract, and the initial deposit(s) has been paid. The client then decides to finance a new car before the file has closed and now the income ratios are over, and the bank will not advance the funds. The buyer could now be at risk of losing their initial deposit and possibly sued for damages by the seller.

To conclude, before and during mortgage negotiations, it is best to not make any other large financial decisions. This isn’t always possible, so it is best to run it by a trusted advisor or mortgage broker first.