Working with a Mortgage Broker

Most buyers need at least some financing (a mortgage) to purchase a home. The two most common sources of a mortgage are directly through a bank or through a mortgage broker. Typically, banks only offer their own mortgage products while mortgage brokers can source mortgage products from different lenders.

Anyone who solicits individuals to borrow or lend money secured by a mortgage, or negotiates a mortgage on behalf of another person must hold a licence with RECA.

CONSUMER TIP: Be wary of unlicensed persons offering to put you in touch with a lender. Fraudsters prey on consumers in desperate situations, such as those facing foreclosure or bad credit resulting in traditional lenders refusing to lend money. Always search the licence status of the person you’re dealing with the Find a Professional search. Avoid becoming a victim of mortgage or debt rescue fraud.

 


Interview questions for a mortgage broker:

  • are you a licensed mortgage broker?
  • do you represent the borrower, the lender or both?
  • do I need to sign a contract?
  • what services do you provide and how will you help me?
  • do you charge borrowers a fee?
  • how do you receive compensation for your services?
  • how many lenders do you work with?
  • was most of your business done through one lender last year?

 


It’s important that borrowers understand the relationship they have with their mortgage broker.

A mortgage brokerage may:

  • represent the borrower (you);
  • represent the lender; or,
  • act as an intermediary.

Mortgage brokers have a responsibility to clearly explain their role to borrowers they’re working with.

When they are representing you, the borrower

When a mortgage brokerage represents you, as a borrower, you are a CLIENT. They must act in your best interests at all times, and will owe you general, fiduciary, and regulatory obligations. These include undivided loyalty, confidentiality, full disclosure, obedience, reasonable care and skill, and full accounting. They will recommend financing options to you, advocate on your behalf, and provide you with confidential advice.

When they are representing the lender

When a mortgage brokerage is representing the lender as their client, they will be acting in the lender’s best interests at all times, not yours. They can still work with you; however, they will treat you as a customer.

When you are a customer, the mortgage brokerage must:

  • treat you honestly and act with reasonable care and skill
  • gather information on the property you want to finance and on your financial situation
  • explain the lender’s options to you
  • complete the necessary documents and submit them to the lender
  • tell you about the transaction’s progress and pass along any communications from the lender to you

The mortgage brokerage cannot give you advice or act in any way that would be a detriment to their client, which is the lender. The lender has their undivided loyalty.

When they are acting as an intermediary

A mortgage brokerage may act as an intermediary between you, as a borrower, and potential lenders. In this case, both you and the lender are customers of the mortgage brokerage.

The brokerage will facilitate the mortgage deal by gathering information, explaining the options, completing the necessary documents and keeping both sides apprised of the deal’s progress. They will not act to the benefit or detriment of you or the lender(s). Alberta mortgage brokerages often work as intermediaries when working with residential borrowers.

It is the mortgage brokerage’s decision

Each mortgage brokerage decides its own business model. Some only represent lenders, some only represent buyers, and some will represent neither.

 


Mortgage Pre-qualification

Making Sense of Mortgages Poster

Your mortgage broker has tools to help you in your home search. Before you go house shopping, you want to know how much of a mortgage your income will support, and what affect your current debt load will have on a possible mortgage amount. You can find this out by getting a mortgage prequalification.

A mortgage prequalification is tentative approval from a lender for a mortgage based on your qualifications (i.e. income, down payment amount) made in advance of a real estate purchase. The prequalification will provide you with the information needed to know how much of a mortgage you will likely be approved for; it’ll help you ensure you’re shopping for homes you can afford.

A prequalification is not the same as receiving approval for a mortgage; it is not a guarantee a lender will enter into a mortgage contract with you. Once you make an offer to buy a property, you will formally apply for a mortgage, and you will have to submit supporting documentation that confirms your financial position. A lender might choose not to approve you for a mortgage after it more closely assesses you and/or the property. While shopping for a home, try to maintain your financial situation. That means it’s not a good time to change employment or take on additional debt (vehicles, etc.).

After you choose either a bank financial specialist or a mortgage broker to work with, get your paperwork in order. You may need to have certain documents available when you seek a mortgage prequalification, and you will definitely need them when you apply for the mortgage – these include:

  • proof of employment (for example, a letter from your employer)
  • most recent Canada Revenue Agency Notice of Assessment
  • confirmation of income (for example, pay stubs or a T4)
  • gift letter (if you’re using a gift as your down payment)

Lenders will review these documents, along with other items such as your credit report, in order to determine how much of a mortgage you can afford. They will also review a couple of key calculations to make that determination:

Gross Debt Service (GDS) Ratio: Lenders use a borrower’s GDS to determine whether the borrower has an acceptable debt level. Your GDS is the percentage of your gross monthly income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes, heating, and half of your condominium fees (if applicable). Generally, for a lender to consider you for a mortgage, your GDS should be no more than 35% of your gross monthly income.

Total Debt Service (TDS) Ratio: Lenders also review your TDS ratio. Your TDS is the percentage of your gross monthly income needed to cover your monthly debt load, which includes your housing costs, plus all of your other debt payments (car loan or lease, student loans, lines of credits, etc.). Your TDS should not be more than 42% of your gross monthly income.

It is unlikely a lender will approve a mortgage if the mortgage puts your GDS above 35% and your TDS above 42%.



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