Common Problems When Applying For A Mortgage And How To Fix Them
Mortgage rates are near record lows right now, making it a great time to apply for a mortgage. However, while it may be more affordable to get a mortgage now than at any time in recent history, it has also become increasingly challenging to get approved for one.
Unfortunately, the regulators have increased the qualification rate used to qualify for a mortgage. The new qualification rate for a mortgage is two percentage points above the contract rate or 5.25 percent - whichever is higher.
Consequently, if you are considering applying for a mortgage, Gary Corriveau of Mortgage Architects Inc. wants to make you aware of the three most common problems people have when applying for a mortgage and how to fix them.
1. Employment situation is not stable
Lenders want to know that you will be able to repay your mortgage, and the best way they can determine that is to look at your earnings history. Specifically, mortgage providers will want to see that you have worked for the same employer or in the same industry for at least a few years.
If you just got a job two months ago, or if you have changed employers five times in the past six months, and your income is all over the place, it is going to make lenders apprehensive and could ultimately lead to your mortgage getting declined.
The obvious solution to the problem is to be patient and develop some tenure with your current employer. However, what if you want to purchase a home now?
What are my options?
If a buyer cannot obtain a mortgage due to a lack of employment history, then most lenders will consider lending if there is someone to act as co-signer or guarantor for a mortgage. The two options provide different requirements.
Co-signer or guarantor for a mortgage which is best?
People often use the terms guarantor and co-signer interchangeably, but they have different responsibilities and rights. A co-signer is a co-owner registered on the title and is equally responsible for payments (although it is often a given that the co-signer will not make the payments). A guarantor, on the other hand, personally guarantees that payments will get made if the original applicant defaults, but they have no claim to the property as they are not on the title.
2. Income is too low
Lenders want to see stable income, and they also want to make sure your income is high enough to cover the bills easily. Consequently, lenders typically use two measures of debt to income to determine mortgage affordability.
Your debt service ratios include your gross debt service ratio and total debt service ratio and are used to calculate the maximum mortgage the lender can offer. This figure is then combined with your available down payment to determine the maximum home price you can purchase.
Gross Debt Service Ratio is calculated as follows:
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees divided by your Annual Income
The ratio should be < 32%
Total Debt Service Ratio is calculated as follows:
Housing expenses (per GDS) + Credit Card payments + Loan payments + Line of Credit payments divided by your Annual Income
The ratio should be < 40%
Lenders use these ratios to ensure that you can consistently make your monthly payment, as they place a limit on the amount of your income that can go towards your housing expenses and monthly debt obligations.
The industry standard guideline for GDS is no more than 32%, and the guideline for TDS is no more than 40%. However, you may be allowed to exceed these limits if you have a stable source of income and good credit. You can get approved with a GDS of up to 39% or TDS up to 44% through traditional lending guidelines.
How to Increase Your Maximum Mortgage Affordability
These are the different steps you can take to increase your mortgage affordability:
Increase your down payment: This will give you the ability to increase your affordability and purchase a more expensive home.
Pay off your debts: This will lower your TDS ratio and free up more of your income for your mortgage payment, ultimately giving you the ability to carry a larger mortgage and buy a more expensive home.
Increase your income: This is the most challenging option, but it will allow you to afford a larger monthly mortgage payment, which will increase the overall size of the mortgage you can afford to borrow and repay.
Alternatively, you can apply for your mortgage with your partner, or get a co-signer, such as your parents, to bridge the income gap.
3. Credit score is not good
It is not just your income that lenders use to predict the likelihood of paying your mortgage balance. They will also scrutinize your past track record of paying bills. The easiest way for them to assess whether you have been responsible for your debt is to look at your credit score and report.
If your credit score is too low and your report shows a track record of defaults, missed payments, or a recent bankruptcy, lenders are going to be concerned that you will not pay them on time. As a result, you will probably get denied for a mortgage.
How Can I Improve My Credit Score?
If you have a bruised credit score, or you have recently moved to Canada and would like to establish credit, here is a list of things you can do to improve your credit score:
- Make sure to have at least two credit facilities in use at all times.
- Use each credit facility every month and pay off the balance.
- Always make your payments on time, and always pay at least the minimum amount. If you cannot make the minimum payment, let your lender know right away, as they may be able to accommodate you by extending your payment due date.
- Do not use more than 35% of your available credit. For example, if you have a credit card with an available limit of $5,000, try not to use more than $1,750 ($5,000 x 35% = $1,750) during each monthly cycle.
- Establish a long credit history. Try not to cancel your oldest credit card, even if you rarely use it. The longer your credit history is, the better your credit rating will be.
- Limit how frequently you apply for credit. The more times you apply for new credit, the worse it looks to lenders. Please note that checking your credit will not affect your credit score.
Improving My Credit Score Takes Time. So, What Else Can I Do?
If a buyer cannot obtain a mortgage due to poor credit, you could ask an immediate family member to act as a co-signer or guarantor.
If you are serious about wanting to enjoy homeownership, the best advice that I can provide is to consult with a mortgage professional as they work for you and have the expertise to help you get approved for a mortgage.
Besides, mortgage agents have access to the entire mortgage market to provide you with a solution based on your specific situation.
If you have any questions about the new stress test or mortgages in general, reach out to Gary Corriveau of Mortgage Architects Inc. I am a mortgage agent based in London and Windsor, Ontario.
I have many years of mortgage lending experience providing various solutions, including first-time homebuyers, refinancing, and second home purchases. I also assist clients with investment properties.
I serve clients across Windsor, LaSalle, Amherstburg, Kingsville, Leamington, Tecumseh, Essex, Lakeshore, Chatham-Kent, London, St.Thomas, Strathroy, Sarnia, Woodstock, Brantford, Stratford, Kitchener, Waterloo, Cambridge, and all over Ontario.