Mortgage Approvals for Pre-Construction Condos: Part 2
As I talked about in my previous post, understanding deposit structures and mortgage approvals is essential to purchasing a new condo from a developer in Toronto.
However, what do you do when you can get the funds for the deposits, but you run into trouble when it comes to securing mortgage preapprovals? This can occur for a number of reasons including:
- Income too low. The number one factor in getting mortgage approvals is your income. Lenders need to see you have enough coming in on a regular basis to ‘pay the bills.’
- Over leveraged. Many investors have several properties and/or contracts in their portfolio at any given time and this can stretch you thin, making the ratios that banks often use for pre approvals look out of wack.
- Self Employed or not enough employment history. Perhaps you are a new grad fresh out of school and your income is low now, but will increase substantially over the next 1-3 years. Or if you are self-employed, lenders often apply even more stringent qualifications before approving you.
So what are your options for getting pre approved? How can you overcome this hurdle and get the condo that you have been dreaming about or that is such a great investment opportunity? Here are a few ways to get around the roadblock
- Use a mortgage broker. Usually developers will have a specific lender they work with and ask purchasers to get preapproved through. And 9 times out of 10 that lender is one of the Big-5 Canadian banks. Their lending standards are often more rigorous than those used by mortgage brokers – who have access to dozens of lenders. Getting a pre-approval from a mortgage broker, if the developer allows it, can be a way around this dilemma for purchasers.
- Get a co-signer. For a number of reasons, you may not qualify for the mortgage at the time you want to purchase the suite, but perhaps you know that by the time the condo is ready for occupancy a few years down the road, your situation will likely have changed and you will qualify. In the time being, and just to get the qualification, why not get a co-signer to get you over the hump? You can always remove or change the other names on title before final closing. Time to put in the dreaded phone call to mom and dad…or your rich uncle who always liked you best!
- Negotiate. Depending on the particular developer, the stage of the marketing life cycle of the project, and the relationship that your real estate agent has with the developer, you may be able to simply remove the condition for mortgage pre-approval from the agreement, or make alternative arrangements that satisfy both parties.
- Letter of Commitment. If you are over-leveraged due to other properties or contracts in your portfolio, sometimes you can’t get a mortgage approval, but if you have a long-standing good relationship with your bank you might be able to get your branch manager or a mortgage manager to write you up a letter of commitment. A letter of commitment is similar to a mortgage approval, but it is less formal and is based more on the ‘good will’ of your relationship with the bank and their intimate knowledge of your personal finances. Sometimes this will satisfy the developer if they see that you are in very good standing with a well established lender even though you don’t technically qualify for the mortgage using traditional ratios etc.
So there you have it. Some suggestions for obtaining mortgage approval when difficulties arise when buying a new construction condo in Toronto.
If you have any questions about mortgage financing for new condos in Toronto, feel free to contact me any time.
