(Four-minute read time)

Homebuyers often enter the mortgage process with a certain confidence regarding the rate they will receive, truly believing it will be the best, only to be disappointed when in fact they cannot qualify for such rates. Naturally, they are left with one burning question: Why? 

This necessary and important question is a hard one to answer, as it involves many factors in their application that can impact their qualification. Often, homebuyers get so caught up in the process that they forget certain details the lender will consider. As brokers, we can certainly help answer the big “why” questions by reviewing key points lenders focus on.

Here are some common reasons why homebuyers may not secure the best rates or unexpectedly not qualify:

Price Increases

Homebuyers often generate and base their rate expectations on people they know who’ve recently purchased homes, particularly those with similar profiles. Unfortunately, this doesn’t always predict an accurate representation of the market, especially today when home prices are constantly and rapidly rising.

For example, if a friend purchased a home a year ago, the cost could have already gone up 30%. Consequently, even if you have the same income and debt levels, your chances of being approved will be less than theirs. This also applies to rates, as what you qualified for last year may be different moving forward as rates keep rising.

Consumer Debt

Undoubtedly, this is the greatest reason homebuyers are not approved for the best mortgage rates. High debt payments, including credit card and car payments, gravely impact one’s borrowing power.

For example, a $400 car payment and $10,000 of debt on a credit card can substantially lower one’s borrowing ability, depending on income and how it impacts their debt-to-income ratios, including the Gross Debt Service Ratio (GDSR) or Total Debt Service Ratio (TDSR). What these ratios allow is for the lender to generate an idea of how the borrower is balancing their debts and income. Depending on the lender, the maximum GDS ratio must be under 32-39%, whereas the TDSR ratio must be under 40-44%.

Over-Utilization of Credit

Being well-prepared for a mortgage application is more than just ensuring you’ve never missed a credit card payment. It’s also about ensuring your cards are not maxed out. Even if you pay on time, constantly maxing out your credit or ranking up large amounts on several cards can lower your credit score. Consequently, a low credit score will not allow you to qualify for the best mortgage rates available.

Self-Employment

Due to write-offs and how taxes are filed, those who are self-employed often have a higher gross income compared to their declared net income. Write-offs, while being desirable in reducing associated taxes, also reduce the amount of income that can be used on your mortgage application. Thus, you may not qualify for what you expect based on your gross income level.

Government Income Inconsistencies

Another factor that decreases your borrowing power is being heavily reliant on government-subsidised income sources, like a child tax benefit or CERB payments. Lenders won’t want such subsidies to represent a large portion of your income and if they see them, they will often deduct them from your income to determine your eligibility. This can also affect you if the lender is looking at your prior years of income to determine your future loan repayment abilities. 

For example, if you had the Canadian Emergency Response Benefit (CERB), the lender will unlikely use this income for qualification purposes. In this situation, it is best to ensure that your income is not only consistent, but based entirely on earnings rather than government subsidies. 

Inconsistent Income

Your income is likely to be used by lenders if you have guaranteed work hours. However, even if you consistently work full-time hours, unless those hours are guaranteed, the lender may not be able to include your full income. This also applies to those who receive bonuses or commissions as supplements to their income. Most often, the lender will use your recent income year or a two-year income average on your application.

No Active Credit

It is absolutely necessary to re-establish your credit profile before applying for a mortgage if you’ve previously had a consumer proposal or bankruptcy. It is not just about the amount of time between declaring bankruptcy and applying for a mortgage. Rebuilding your creditworthiness is the actual imperative objective, as you must prove you can be trusted with loan repayment.

Divorce

Being divorced can impact your borrowing power, which decreases based on payments such as child support and alimony. When making such payments, your debt-to-income ratio increases, in turn reducing your borrowing capacity. If you are receiving child support or alimony, the payments need to be consistent in order for them to be included as part of your income. If not, there is the possibility the lender will avoid considering this income source.

Credit Profile Issues

Lenders are very meticulous when reviewing credit profiles. If any inconsistencies exist, you won’t be able to qualify for the mortgage rate you expected. Something to actively be aware of and look out for is identity fraud. As part of routine or common practice, regularly check your credit report, particularly looking for any unfamiliar or new accounts, as you may not be notified until you check for yourself. 

Also, when revising your credit report, look for any inconsistencies within your personal information, such as an incorrect birthdate. If any discrepancies or errors exist, you can file a dispute with the credit bureau. Before setting up meetings with lenders, be sure to review your credit report to ensure all information is current and accurate.

Active Collections

Before applying for a mortgage, any active collections must be paid off. If paid in time, your credit shouldn’t be affected. It’s equally important to be aware of all or any active collections, as some people find themselves in this situation without realising it.

How Brokers Help

After reading through this list, we hope the information presented helps to answer the big “why” question borrowers ask when they don’t qualify for the best rates and can possibly change the outcome for the next time they apply.

It’s important to remember that as brokers we have tools and expertise readily available to assist borrowers with more complicated files. In some cases, where a borrower can’t be qualified by the best-rate lender, alternative lenders can potentially get the application done, especially for borrowers with at least a 20% down payment. 

Regardless of your situation, what greatly improves your odds of getting a better rate and assists in the overall process is being over-prepared and knowing exactly how the lender will be scrutinising your application.

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