As mortgage brokers, we know that homebuyers often enter the mortgage process with confident expectations surrounding the rate they expect to receive, only to be disappointed when they can’t qualify for the best rates.
They inevitably always come back with one burning question: why? Why do homebuyers not qualify for the mortgage rate they thought they would?
This is a great and important question, but it can also be a hard one to answer, since there are so many factors in their application that can impact their qualification. Many homebuyers often get caught up in the process and forget about one or two details that the lender will take into account. As brokers, we can help answer that big “why” question by going through the key points lenders look at.
Here are some of the more common reasons why homebuyers who expect to qualify are later refused, or aren’t able to secure the best market rates.
Consumer debt
This is one of the biggest reasons homebuyers are not approved for the best mortgage rates. Having high debt payments, such as auto or credit card payments, can seriously hinder one’s borrowing power.
For example, a $400 car payment and just $10,000 of debt on a credit card can lower one’s borrowing power substantially, depending on their income and how it impacts their debt-to-income ratios, including the Gross Debt Service Ratio (GDSR) or Total Debt Service Ratio (TDSR). These ratios provide the lender with an idea of how the borrower is balancing their debts and income. The maximum GDS ratio must be under 32-39%, while the TDS ratio must be under 40-44%, depending on the lender.
Price increases
Homebuyers often frame their expectations based on the people they know who have recently bought homes, especially those with a similar profile. However, this doesn’t always create an accurate expectation of the market, especially in an environment like today where home prices have been rising rapidly.
For example, if your friend purchased a year ago, the cost of that home could already be up to 30% higher. As a result, your chances of being approved will be less than theirs, even if you have the same income and debt levels. The same applies to rates. What you qualified for last year may be different moving forward as rates continue to rise.
Irregular hours/inconsistent income
Lenders are more likely to use your income if you have guaranteed work hours. Even if you regularly work full-time hours, unless those hours are guaranteed, the lender may not be able to include your full income. The same applies to those who receive bonuses or commissions that supplement their income. The lender will most often use your two-year income average, or your most recent income year on your application.
Self-employment
Those who are self-employed generally have a higher gross income compared to their declared net income due to write-offs and how their taxes are filed. While write-offs may be desirable as a way to reduce income and associated taxes, they also reduce the amount of income that can be used on your mortgage application. This means you may not qualify for as much as you expected based on your gross income level.
Divorce and borrowing power
If you are divorced, your borrowing power can decrease based on alimony or child support payments. If you are making the payments, your debt-to-income ratio will increase, reducing your borrowing capacity. If you are receiving child support or alimony, lenders will want to ensure you are receiving that income consistently in order to include it as part of your income. If it is not being received consistently, there is a chance the lender will avoid using this income source.
Government income inconsistencies
Suppose your file is too heavily reliant on government-subsidized income sources, like a child tax benefit. In that case, your borrowing power will go down, as lenders won’t want the child tax benefit to represent too much of your income. Another way government-related income can be inconsistent for a lender is if they are looking at your prior years of income to determine your future loan repayment abilities. One example would be if you have Canadian Emergency Response Benefit (CERB) payments included as part of your income. Your lender will not likely use CERB income for qualification purposes, and will instead assess your income level as whatever it was less the CERB money. To best prepare for this scenario, ensure that your income is consistent and based entirely on your earnings rather than government subsidies.
No active credit
If you’ve had a previous consumer proposal or bankruptcy, you need to re-establish your credit profile before applying for a mortgage. It’s not just about the amount of time that has passed between declaring bankruptcy and applying for a mortgage. The most important objective should be rebuilding your creditworthiness, proving that you can be trusted with loan repayment.
Over-utilization of credit
You might think that you are well-prepared to apply for a mortgage because you’ve never missed a payment on your credit card. But, before doing so, you need to ensure that your cards are not maxed out. It might surprise you, but consistently maxing out your credit or building up large balances across multiple cards can drop your credit score even if you pay them off in time. Having a lower credit score typically means you won’t qualify for the best-available mortgage rates.
Active collections
If you have any active collections (debts owed on your cell phone or internet bills, for example), they need to be paid off before applying for a mortgage. If you pay them off in time, your credit should not be affected. But keep this in mind, as some people have active collections without even realizing it.
Credit profile issues
Lenders pore over credit profiles very carefully. If there are any inconsistencies, you will not be able to qualify for the mortgage rate you expected. Something else to watch out for is identity fraud. Regularly check your credit report for unfamiliar new accounts. If a fraudster opens a new account using your information, you may not be notified about it until you check your credit report.
When scanning your credit report, be on the lookout for any inconsistencies in personal information, such as the wrong birth date. If you notice any issues, you can file a dispute with the credit bureau. Make sure you check your credit report before any lenders do to ensure everything is up to date and accurate.
How brokers can help
Hopefully this list helps to answer the big “why” question borrowers ask when they can’t qualify for the best rates, and may change their outcome for the next time they apply.
Another thing to keep in mind is that, as brokers, we often have the tools and expertise at our disposal to assist borrowers with more complicated files. If the borrower can’t be qualified by the best-rate lender, competitive alternative lenders can sometimes also get the application done, particularly for borrowers with at least a 20% down payment.
No matter your situation, being over-prepared and knowing exactly how a lender will be scrutinizing your application will help greatly with the overall process and improve your odds of getting a better rate.