Applying for a mortgage can be a lengthy process, to say the least. This is often exacerbated when you encounter questions that seem more suited to a political survey than a financial form.
Your might wonder, for instance, why you're being asked about potential "political targets" or "politically exposed" people in your family as you fill out your application. As a first-time homebuyer, you may be caught off guard by odd questions like these. However, these questions are often par for the course as mortgage lenders like to be as thorough as humanly possible.
From questions about the origin of your down payment to reviewing 鈥渦nusual鈥� sources of income, banks want to ensure there are no surprises before they approve your mortgage. Below, I鈥檒l outline some often-unexpected questions you should prepare for and I鈥檒l try to explain why they鈥檙e being asked.
POLITICAL TARGETS?
When applying for a mortgage, stumbling across a question about 鈥減olitical targets鈥� or "politically exposed persons" isn鈥檛 what most homebuyers likely expect.
This question isn鈥檛 just about banking bureaucracy, though. It's part of lenders鈥� (KYC) policy designed to safeguard banks against money laundering, illegal activities, and other potential threats.
The national average home price moving into November was $656,625, according to a recent report from , an online review platform for real estate agents. In major cities like Toronto and Vancouver, many homes are listed for .
Lenders aren't just interested in your financial ability to repay a loan. Before banks approve loans like these, they want a complete understanding of exactly who they鈥檙e lending money to.
This includes assessing potential risks associated with lending to someone who might be a political target, such as threats from terrorists and kidnappers. While it may seem like a scenario straight out of an espionage movie, it's a real consideration in the financial world.
OTHER QUESTIONS YOU MAY ENCOUNTER
Asking about political targets certainly tops the list of seemingly odd questions prospective homebuyers may be asked. However, it鈥檚 not uncommon for lenders to question you about that and some of these other topics during your mortgage application process.
1. Employment history and stability
Lenders like to see financial stability in mortgage applicants, and your employment history is a great indicator of this. Reporting a steady job history suggests that you have a reliable income stream, which is essential to cover your monthly mortgage payments.
Before applying, make sure that your resume showcases consistent employment. Many lenders want to see that you have at least two years of consistent income.
For those with a more eclectic work history (such as subcontractors or small business owners), be prepared to explain any gaps or changes in your income history.
2. Unusual sources of income
Income diversity can be a strength, but it can also raise eyebrows.
Lenders may question income you鈥檝e received from unconventional sources to assess its reliability. Seemingly random cheques, money wires, and cash deposits almost always raise a red flag among lenders.
Be transparent about where your money comes from and have documentation ready to prove its legitimacy.
3. Reasons for moving
Although this question might seem personal, it鈥檚 part of the lender鈥檚 overall risk assessment process. Understanding your motivation for moving helps lenders gauge the stability of your investment.
Whether it's for a new job or more space, clear and logical reasons can reassure lenders of your commitment. For example, a borrower who recently picked up and moved across the country for a brand-new job may represent a higher risk compared to a borrower who鈥檚 been living in the same province for several years working for the same employer.
4. Credit history beyond your score
Your credit score is just the tip of the iceberg. Lenders might dive deeper into your credit history to understand your financial behaviour. Make sure your credit report is error-free and be ready to explain any anomalies or past financial hiccups.
You can get a complete credit report for free from Canada鈥檚 two major credit bureaus: and .
5. Future financial plans
Lenders may inquire about your long-term financial goals in order to understand your overall financial health and planning. Be honest about your future plans, as this can demonstrate foresight and financial responsibility.
For instance, if you plan to quit your job and start a business in the next year, this risk could affect your ability to make mortgage payments on time.
6. Specific details on your down payment
Aside from wanting to see consistent sources of income, lenders may ask for specific details as to where your down payment money is coming from.
Be prepared to provide detailed information about how you accumulated your down payment, whether through savings, investments, or a gift, to assure lenders that you鈥檙e financially responsible and able to handle your mortgage payments moving forward.
KEEP RECORDS, REHEARSE ANSWERS
At their core, all of these questions aim to peel back the layers of prospective homebuyers鈥� personal and financial lives to ensure that the funds for your home aren't entangled in potentially problematic situations. Lenders also want to make sure that borrowers will be able to make steady mortgage payments and have a very low risk of defaulting on the loan.
The best way to prepare for these questions is to keep detailed records of any and all financial transactions. When you speak with lenders, the more organized you are and the more proof you have of your ability to be financially responsible, the easier the loan application process will go.
Canada鈥檚 real estate market could be in for some major changes in 2024. Keep reading to see how the upcoming renewal of pandemic-era mortgages could rock the foundation of Canada鈥檚 housing market.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his .
Do you have a question, tip or story idea about personal finance? Please email us at dotcom@bellmedia.ca.
