With the real estate market being what it’s been the past few years, the mortgage application and approval process is more important than ever. Stress test rates are hitting new highs and many buyers (especially first-time ones) require a cosigner. So, let’s take a look at these factors as well as the significance of closing dates and rate-hold periods.
Stress Test
This is probably the most impactful topic in mortgages right now. We can all agree that rates are higher BUT that rate is not inhibiting mortgage approvals, the “stress test” is. The stress test was introduced in Canada in 2016 as a way to protect buyers from interest rate increases. The calculation was designed to test whether or not you could afford your purchase if the interest rates were 2% higher than what you would actually have to pay.
Technically, it was a set rate of 5.25% or what you were paying plus 2% (whichever of the two was greater). Up until March of 2022, we only had to qualify up to 5.25% as most fixed rates were below 3.25%. With current rates being between 4.5-5.5%, stress test rates are now 6.5-7.5% which equates to about a 7% decrease in buying power.
Cosigning
Cosigning means bringing a third party (typically a family member or relative) to help with your mortgage application and approval. A cosigner usually fills a “gap” in your application be it credit, income, or even employment. Effectively, all parties’ incomes and situations (combined) are taken into account.
Let’s say you’re looking to get pre-approved, you have an excellent job, and great credit but get priced out of your desired range due to the stress test. Since we can’t produce income from thin air, the easiest way to get qualified is to add a cosigner. With someone willing to cosign, there’d be enough income to qualify for the financing on the desired property, right? Not necessarily.
Myth: Anyone is a good cosigner.
Fact: Your cosigner needs to bring the strengths that you may be lacking to supplement your deal. Since their financial life comes with them, their liabilities do too.
The cosigner’s liabilities can inhibit their ability to help and vice versa in some cases. You may think that your parents are great cosigners but a new car purchase they might have made could throw a wrench into the deal. Remember, from the lender’s perspective, can they afford their mortgage, their new car, any debt, plus your mortgage?
Closing Dates
When you sell your home and buy a new home, one of three scenarios could occur:
- You sell your home first and close on the new one after (likely renting a place for the time in between or staying in a hotel if it’s a short period of time)
- You try to do everything the same day (which is a nightmare for all parties involved)
- Your closing date for the new place is prior to the first and a bridge loan is needed
Clearly, closing dates are important and play a big role in determining the next steps. Since your pre-approval and rate hold have a shelf life, the process needs to be completed within the specific time period. If you’ve got a rate hold for 120 days but close on the 125th day, you would be subject to updated rates and a new qualification… which could blow your deal.
Myth: You can close outside of your rate hold date and still keep your rate.
Fact: This is not true, unfortunately. Rate hold dates are set in stone so it’s important to close within your lender’s specified period.
So maybe you’re working with a builder and the completion date has been pushed back. Typically, that’s not a big deal but things can change if the new closing date falls outside of a pre-approved rate hold timeline. Due to the dynamic nature of rates in the current market, having to re-qualify will mean (likely) doing so at a higher rate and an increased payment. Remember to always be mindful of your closing and pre-approval dates, they can make all the difference in your deal.
Contact the Kyle Miller Mortgage Agent team to learn about the different financing options available to you!
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