Previously in this series, we took a look at the supporting documentation for the income and downpayment portions of a mortgage application. These two sections comprise the bulk of the documentation needed in this process but there is one important area left – Property. Lenders want to be sure that the property in question is as good an investment as we say it is on the mortgage application and they also want to be sure it is indeed the property we have indicated. This is done through three forms of documentation:
1) Purchase Contract – Whether you are purchasing a property listed by a Realtor or privately, by the current owner, the lender will require you to provide a proper Purchase Contract. Your Realtor will complete the document for you when you are making the offer to purchase. When all parties have agreed on the terms of the contract, your Realtor will ensure that the contract has been signed by both the seller and the purchaser. Your Realtor will usually take care of forwarding a fully signed copy of the contract to your mortgage broker or bank as well as your lawyer.
If you are purchasing a For Sale By Owner property, you and the owner will most likely draw up the contract together but it is wise to have it reviewed by your lawyer before signing off.
In either case, the contract will set forth the purchase price, the deposits that were made at the time the offer was accepted and details pertaining to any other deposits that will be made. It will indicate the date of possession as well as the date that financing must be in confirmed ( known as the Condition of Financing Date) and it will state any other conditions of the agreement and the date upon which they must be removed. There should also be a good deal of legalese pertaining to the contract being binding and anything that would cause the contract to be void.
2) MLS Listing Sheet – This is the document that your Realtor provides to you that usually has a picture of the property on the left hand side as well as the price, address, tax information and property details such as the number of rooms and square footage. It will indicate if there is a garage, basement development or any fireplaces. Lenders put a good deal of trust into these documents as they are prepared and issued by licensed Realtors who are bound by the rules of their licensing body to provide accurate and trustworthy information.
If the property is listed privately by the current owner, the lender will rely on an appraisal by a licensed appraiser who is approved by that particular lender.
3) Property Appraisals – The purpose of an appraisal is to provide an educated opinion of the value of a property. Appraisers take into consideration the size, general condition and location of the property as well as the sales of comparable properties in the last 30 days. Appraisers are not to be confused with inspectors, who are looking for any defects to the property – in fact appraisers only spend about 15 – 20 minutes in the property as most of their work is done back at the office, looking for recent sales of similar properties in similar areas. Again, appraisers are bound by the rules of their licensing body and lenders rely on their work to be accurate and fair according to these rules.
Not all mortgages will require an appraisal. If your downpayment is less than 20% of the purchase price, your mortgage will require mortgage default insurance and the insurer will use their own systems to value the property, only rarely requiring an appraisal. However, most private sales will usually require an appraisal, no matter the size of the downpayment. Sometimes properties will require an appraisal because they are unusual such as a log home or they are a good bit out of town or are in foreclosure. In any case, the lender will indicate to your mortgage broker if one is needed and they will take care of ordering it for you. The cost most often falls to the mortgage applicant but is sometimes covered by the lender or the insurer.
This concludes our Mortgage Documentation series. Every mortgage application is unique and sometimes documentation not mentioned here may be required to verify a detail on your particular mortgage application but the lender will nearly always ask for the documents covered in these three articles. Gathering these documents may seem a daunting task and it may even feel a bit invasive and annoying. It helps to remember that the lender is purchasing this property with you and in most cases, they will own the most of it for a good, long time. Just as you are careful in choosing the right home and the right lender to deal with, they are careful in choosing the right property and the right applicant to invest in. The primary motivation for all of this documentation is to prove that the information on the mortgage application is true and correct. Typically, the document gathering and approving process must be completed within seven to ten days on most purchase contract so it’s all usually over with pretty quickly and a good mortgage broker will work with you to provide support through this exciting but sometimes stressful process!