The home is the collateral for the mortgage loan. The lender must determine that the property offers adequate value as security in relation to the mortgage loan amount. In addition they must determine whether it is likely that there will be any capital or maintenance costs that would put a drain on the applicants financial resources and could affect their ability to manage their mortgage payment obligations in the future. In order to make this decision the underwriter hires a professional real estate appraiser. The appraiser will submit a report detailing their estimate of the value of the residence based on the recent sale of comparable properties in the area.

The underwriter will be particularly interested in the overall value of the property to ensure that it sufficiently covers the mortgage loan within the required loan to value ratio limits, usually 75%. The age and condition of the property determines its’ remaining economic life. No mortgage amortization should exceed the economic life of the property. Properties in poor repair will likely cost more in maintenance or renovation in years to come. These costs are factored into the analysis.

Loan to Value Ratios (LVR):
The loan to value ratio is calculated by dividing the mortgage (s) by the property value or purchase price. This ratio sets another upper limit on the amount of financing a lender will provide to a qualified purchaser.

Mortgage lenders typically lend based on the borrowers ability to afford the costs associated with the property and financing. The amount of mortgage an applicant receives is determined by the borrowers debt service ratios and the value of the property. If the subject property has a lending value of $200,000 the maximum mortgage loan the lender will provide is usually 75% of this value, regardless of whether the applicant qualifies, from an income perspective, for a mortgage of $200,00. The lender will only approve a mortgage of $150,000 on this property unless the added risk of the high ratio loan is insured away by mortgage default insurance.

Mortgage lenders want to ensure that the applicant will have a sufficient stake in the property. In addition their equity contribution must be adequate enough to cover all costs and balances owed in the event that the lender has to take possession or sell the property. These costs can include legal proceedings, accrued interest, property repairs, insurance’s, marketing expenses and Realtors fees as well as added administration costs. The equity also acts a safety buffer in the event that property values decline in a slower market.

Conventional Mortgage:
Mortgages with a loan to value ratio of 75% or less are termed Conventional Mortgages. 75% is the maximum a lender can advance. If the applicant requires more financing they will have to purchase mortgage insurance.

High Ratio Mortgage:
High Ratio Mortgages have a LVR above 75%. The risk of these loans is substantially increased due to the lower amount of owner equity. Mortgage lenders will only allow an applicant to have a high ratio purchase mortgage if the applicant insures the mortgage through one of Canada’s mortgage insurers, GE Capital Mortgage Insurance Services Canada or Canada Mortgage and Housing Corporation. By insuring the mortgage the applicant will be able to receive financing up to 95% of the value of the property. This substantially reduces the down payment requirement and allows more families to buy a home earlier.

Underwriting Conclusion:
After the underwriter has reviewed the entire loan package, there can be four outcomes:

Approval:
If the loan is "picture perfect" and the underwriter has no questions, the loan will be approved with no conditions.

Approved with conditions ( the most common response):
(a) If the underwriter needs additional documentation before a final credit decision can be made, a conditional approval will be given. In essence, the loan documents will not be prepared until the condition has been satisfactorily met. An example of a condition could be a pay stub to validate the borrower’s income.

(b) If the loan can be approved, but a condition must be met prior to closing, a "prior-to-funding" conditional approval will be given. In this case, the loan documents will be prepared and sent to the lawyer, but the lender will not fund the loan until the condition has been met. An example of a "prior to closing" conditional approval could be proof of sale of existing home where the equity will be used as the down payment.

Suspended:
In this case there is insufficient documentation of verification to decide whether or not to approve or decline the applicant. The mortgage lender will request the information and will set the file aside until these items are delivered.