Pre approved mortgage denied because of consumer proposal

Consumer Proposal can de-rail a pre approved mortgage

approved deniedToday’s question came from a reader in Alberta who is currently in a consumer proposal and also wants to buy a new home.

“I moved to Alberta in 2007 for a family crisis and have had some personal hurdles to overcome in regards to employment – as a result, I incurred a high debt ratio, and have been working to improve the situation. One of the steps that I took was to try consolidating my debt into one large loan. I approached private lenders, the Royal Bank and Tangerine but no one was able to consolidate.

As a result, I was making the minimum monthly payments, but was not reducing the debt owed. I then went to a credit counselor and was advised to make a consumer proposal. This is the option that I took. In May of this year I found myself unemployed again, and as this was a small community with very few jobs. I realized I should move to a larger center to find employment, and am currently working on a contract.

In preparation, I spoke to Tangerine (my mortgage lender) about selling my home and porting my mortgage, and they were onside. I did all of the background exchange with Tangerine and told them I had a consumer proposal. Nothing was said regarding this information. I obtained a pre-approved mortgage from Tangerine, and went looking for a place to buy. I found a home, put $1,000 down  but later when I formally applied to port my mortgage, I was denied due to the consumer proposal and the fact I had applied for a consolidation loan a year earlier and was turned down.

This is now my situation – I have no home as mine has been sold, I have no new place to move into because my port was denied, I have lost $1,000. My question to you is what do I do now, I have three weeks to move! Your prompt reply would be appreciated.”

-D.G.

It sounds like you were dealing with mortgage servicing staff, as apparently no one seemed to realize that with your proposal you are a special case. Had an actual underwriter been given all these facts upfront, she almost certainly would have denied the port – but at least before you wasted your $1,000 and got your hopes up.

As long as you still have a balance owing on your proposal, your options are extremely limited. No lender will lend you a mortgage while you still have that debt. Perhaps there is enough equity to pay off your proposal when your house sells and retain a significant portion for a down payment on a new home?

Even if so, it’s a very tight timetable and your situation would kibosh most lenders other than private lenders. If a private lender was willing to work with you, you’d be looking at a first mortgage rate of around 7%, maybe more, and a whole bunch of one time fees.

The Short Term Solution While You’re In a Consumer Proposal

I’m happy to give more info about settling your proposal, but in my opinion, the practical near term solution to your circumstances is to arrange rental accommodations – given your credit status you should probably offer at least a few month’s rent upfront.

Although this is a very special case, the underlying message is one for everyone seeking a pre-approval before buying a new home. Most of the time your request will not go through a formal underwriting process. Only if a specific request for full underwriting is made, and all documentation provided upfront, will you be on more solid ground. And even then, the pre-approval may not protect you from changing personal circumstances, nor does it automatically approve the actual property you then try to purchase.

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