Preapproval process lets you know what you can afford
This is the second part of the series about the anatomy of a mortgage contract. In part one, we coved the basics – the various kinds of mortgages, legal ownership, and some of the process.
Readers, please keep in mind that this is a general discourse on the personal mortgage contract and processes updated for 2022. Buyers should seriously consider consulting a real estate attorney to assure that they understand the terms of the contract that represent in full, what they are buying, what they are liable for, and what their responsibilities are as the mortgagor(s).
Lending experts please feel free to contact me, confidentially or not. I am always looking for in-depth knowledge and clarification as all information benefits our readers and consumers!
I am also looking for a voluntary reader who might provide a completely redacted copy (no personal references of any kind) of a recent local mortgage contract, in order to provide an authentic Bermudian overview of the process of purchasing a dream home.
Second step
The preapproval process: your lender, the seller and your/their real estate agents need to know how much property you can afford.
The buyer preapproval process was developed over the years to streamline the home shopping process, manage expectations for both buyer and seller, avoid severe disappointment, disruption timing of family moving schedules, and very importantly, litigation over contract blow-ups and other issues.
Preapproval also means that you are verifying your financial life, as exactly as you can, with generally limited to no reliance on uncertain estimates by your lender: for example, we may get a bonus, a promotion, or inherit a sum.
Self-employed individuals are challenged further in presenting a complete business financial statement supporting net earnings/profits.
You will also provide verifiable proof of your financial condition, as pay stubs, bank statements, tenant agreements, alimony, child support, self-employed business contracts as detailed by your lender.
It is worth stating here that a serious misrepresentation of you, the buyer’s financial picture may be considered grounds for breach of contract.
Truly, you can understand that these transactions define the need for gaining as much financial knowledge, or literacy, as best as possible.
A preapproval application requires the following, with the assumption that the applicant has a savings/chequing account at said bank:
Who is /are the applicant(s)?
• You?
• You and your spouse?
• You and an unrelated party?
• You, as the owner of a unincorporated business?
• A family trust with you as the grantor, beneficiary, trustee, or guarantor?
• Where do you live? How many years have you resided there? Cite prior residence
• Marital status: single, separated, divorced, widowed, civil partnership,
• Number of dependents, children and possibly eldercare relatives. I have worked with adults paying their seniors’ nursing home fees, a tremendous expense when saving for one’s own retirement.
• Nationality: Bermudian, but what if one of the parties is not a Bermudian?
• Residence: own (name of mortgage holder), or own home free and clear; rent – name of landlord; live with relatives;
• Employer, present – number of years, and details of previous employer
• Occupation
• Debts with a local credit association?
• Outstanding judgments of defendant(s) in lawsuit or actions?
• Obligations or liabilities such as endorser, comaker, or guarantor on say vehicle, personal loan, etc.?
• Debts of child support, alimony, eldercare, or other financial responsibilities.
Your personal financial statement
Married spouses can list together. In the case of unrelated parties – guarantor, trustee, partner – generally, each individual submits an application and financial statement.
Financial statements (FS) are detailed. In “accountingese”, they list the individual’s income, expenses, equity assets, and liabilities, all to clearly define the applicant’s net worth.
In banking terms, FS defines the applicant’s present net assets and projected ability to pay the mortgage now, and in the future.
Monthly income: all sources – salaries, child support, investments and rental income, other income from second jobs, etc bonus, and pension annuity.
Monthly expenses: rent or existing mortgage, church tithes, child support, land tax, insurance (home, life, vehicle, or tenant), health insurance if self-employed or retired, household, food, and all miscellaneous.
Monthly loan payments: vehicle, bike, furniture, loans from family, credit cards.
Assets: bank accounts, investments (stocks, bonds, mutual funds, ETFs, hedge funds, commodities, cryptocurrencies); loans made to friends, relatives, or corporations; real estate, in Bermuda and overseas; vehicles, boats, collectibles, antiques, jewellery.
Debts: current mortgage, if held; personal line of credit; vehicle, or other transportation loans; credit cards; child maintenance and support.
What’s next?
Time to find a home in your price range:you and your family, significant other, etc, have passed the preapproval review with your lender and are assigned a range value of home prices you can afford.
You looked and looked, and now you’ve found your dream home, made an offer that was accepted, then signed the home ownership purchase/sale agreement subject to certain conditions.
The buyer may contract for a property inspection, home survey and related reviews. The property sellers may also disclose facts and conditions relative to the property for the buyer to review prior to signing the purchase and sales.
In our neighbouring countries, various types of seller’s property disclosures are required by law to disclose to a buyer all facts known to a seller that may not be readily observable by a buyer.
The entire home search from preapproval to purchase to mortgage contract to taking possession is a disclosure and negotiating process that is designed to provide maximum satisfaction for all involved, the buyer, the seller, the lender, and other possibly related parties.
Everyone involved wants the assurance that they have put forth their best, truthful effort that also manages the most appropriate deal for them.
Before the closing certain other processes take place. One is assurance of a clear title to the property under purchase consideration. Next is understanding clearly the terms of the mortgage contract.
Review your copy of your mortgage contract before the closing, or hire a knowledgeable real estate attorney. This is the biggest purchase and asset of your life!
More: Anatomy of a mortgage contract, part 3 – October 29.
Disclosure: Martha Myron has no connection to any mortgage lender; further, specific terms and conditions will vary from lender to lender; professional guidance is recommended.
• Martha Harris Myron is a native Bermuda islander with US connections. Author of Bermuda’s first financial literacy primer – The Dawn of New Beginnings and Bermuda – Bermy Island Finance Blog www.marthamyron.com. Contact: martha.myron@gmail.com
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