Mortgage Pre-Approval and C.M.H.C.: What Buyers need to know!

Being pre-approved by a mortgage lender is, today, the absolute minimum requirement before looking at, or making offers on, homes or condos.  In this day of 'multiple offers', homeowners can not take your offer seriously unless they know that you are pre-approved by a lender.  But there is a bit more to this story:

In Canada, Banks are permitted to loan out (mortgage) up to 75% of the value of the home.  For a $160,000 home, they can loan out up to $120,000 to the buyer.  The rest, in this case $40,000, has to come by way of a down-payment, or be insured by a Mortgage Insurance Company.  In Canada we have Canada Mortgage & Housing Corporation (CMHC)  and GE Mortgage Insurance Canada.

Here is how it works:  Mr. & Mrs. Smith want to purchase that $160,000 home, but only have 5% down payment ($8,000).  This means that they will require the above "Mortgage Insurance", and CMHC or GE will be happy to do so, provided that the Smith's qualify (i.e. have a clean financial history, with no defaults or bad credit).  Of course, either company will charge for this service, and this amount, usually several percent of the value of the mortgage, will be added onto the monthly payments.

Here is where it gets interesting:  Banks (or Credit Unions for that matter) may 'pre-approve' the buyers, but they can not speak for CMHC or GE.  The final word is up to these insurers.   So we could have a situation where the Smith's are pre-approved, and their offer is accepted, however once the entire deal is shipped to CMHC (or GE) for approval, it could still fall apart.

If that happens, the Smiths could loose their deposit, if they were not careful in how their offer was worded.  For example, if they wrote an 'unconditional offer', and CMHC denies their application, they will not get a mortgage, will not get the house, and thus loose the deposit.

Must Read:  Deposits: Why do we need it and is it safe?

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