Why do mortgage applications get declined and how to overcome it?
2015-11-03 | 08:24:08
I receive calls every month from people who want to know how to qualify for a mortgage because they were declined by their bank. In many cases I can help them and in some cases they have to wait – but we identify what they need to do to get in a better situation to qualify.
I received a call today from a great client, she made a statement I have heard every month by clients. She said “I want to buy a house but I don’t think I can qualify. I don’t really know what it takes but I think I won’t get approved.”
I also meet with clients who have been declined by their bank. They come to me frustrated and without a game plan. I can often help them get a mortgage in the short term, and can almost always help them set up a plan to fix the problem and get a mortgage in the future.
Here are the 5 major reasons why people don’t qualify for a mortgage and a little advice on how to repair the problem.
#5 Lack of a Down Payment or Equity
I often get asked about cash back or zero down mortgages. Unfortunately these programs are no longer available to help with down payment. Current rules require borrowers to come up with down payment from their own resources or receive it as a gift from a family member. There is a great program for clients with excellent credit where down payment can come from borrowed funds. Minimum down payment is 5% for the purchase of an owner-occupied home or 20% for a rental property. Minimum is 20% equity in the home if it is a refinance. This will help you qualify for a mortgage.
There are some easy ways to automate savings, we help clients set up. There are also RRSP loans and a program to withdraw them tax free.
#4 Insufficient Income
With the high price of homes, sometimes people simply don’t earn enough money to manage a mortgage payment, property taxes and the associated bills along with existing consumer debt and still have a life. For some home buyers, the only other option is to access more money for a down payment (gifted) or try to purchase a home with suite income or look at alternative lenders who accept room and board and other sources of income to help you qualify for a mortgage. In some instances, home buyers will look for someone else to go on title to add income to the application.
This is where a preapproval can really help you with your shopping by giving you a high end to begin shopping with.
#3 New Mortgage Rules
For those with less than 20% down payment, the new mortgage rules are adjusted to the debt servicing ratios and amortization for borrowers. The new rules for debt servicing apply to those with good credit scores and allow for a max of 39% (gross debt servicing – GDS) of gross monthly income to cover the mortgage payments, property taxes and heating costs. In addition a max of 44% (total debt servicing – TDS) of gross monthly income is allowed to cover the costs in GDS and other consumer debts such as loans, credit cards and lines of credit. The maximum amortization was also reduced from 30 years to 25 years – effectively tightening qualification for borrowers equivalent to a 1% interest rate hike.
#2 Credit Issues
Some people don’t realize if they are late on credit card payments, their mortgage or loan payments the lender will update the credit bureau agencies and the late payments will reflect on their credit report, lowering their credit score. Other items can also effect credit scores such as a collection (if you didn’t pay that parking ticket or fitness membership fee they can send to a collection agency) and those marks on your credit report make your score drop like a rock. Going over your credit card limit, and applying for credit often requiring your credit report to be pulled by the bank, auto dealership and credit card companies will lower your score. Finally, consumer proposal and bankruptcy will greatly impact your score, which can stay on your report for up to 7 years if real estate was involved as is the case with bankruptcy.
There are strategies and methods to rebuild credit quickly. Following this can get you back on track in no time.
#1 Too Much Debt
There are a growing number of consumers doing – well – too much consuming. Credit card debt is on the rise and over using lines of credit are putting some people in a debt overload situation. Some pre-home-buyers go out and purchase that amazing new truck, along with a large monthly payment, which pushes their total debt servicing (TDS) ratio over the limit. Nice new truck = no home with a garage. Some home owners have so much consumer debt that they are unable to refinance their home to consolidate the mortgage and the credit card debt because the amount exceeds the maximum loan to value allowable (currently 80% of the value of the home) and if housing prices stabilize or drop in some areas – this makes it more difficult for home owners to qualify for that new mortgage and lower payments.
Paying off your debt will help you qualify for a mortgage. Also restructuring it into a better payment plan can help with qualification.
The truth is that mortgage rules are complicated. With over 30 lenders and each lender with 6 to 10 different mortgage options it is worth it to work with a mortgage broker that knows the programs and rules. The best advice is to start your preapproval early to give you time to overcome any hurdles and get ready.
Preapprovals and consultations are always free! Contact us here at Dominion Lending Centres – we’re here to help!