28 May

Reasons You Get Turned Down For a Mortgage

General

Posted by: Lyle Green

In the lending landscape of today, with all the recent changes made by the Federal Government, it is much tougher to qualify for a mortgage. A lot of people are being told no, or not yet, or worse, don’t even think about it! Having observed the troubles of our neighbours from the south, we have tightened the reins (too much in my opinion) to avoid falling into the same fate. That being said, the rules are there and must be followed. So let’s get into some reasons why people are getting turned down for a mortgage.

1. Too Much Liabilities – you may make $1 million a year, but if you have liabilities to match, you won’t be able to qualify for a mortgage. Generally, depending on the lender and your credit score, about 35% of your gross income is allowed to cover housing costs. That includes the principle mortgage amount, interest on the mortgage, property taxes and heating costs. However for total expenses you are generally allowed 42%, which again is dependent on the lender and your credit. Total expenses would include things like vehicle payments, credit card bills, student loans, alimony & child support. If you have these and they are high, which can be easily achieved, then you may be in for some bad news. And now that all mortgages, including the 5 year fixed rate, must qualify at the benchmark rate (currently 4.64%) it’s even more critical to keep your liabilities in check.
2. The Insurer says no – When you put less than 20% down payment on a home purchase, you are required to get mortgage insurance that is for the sole benefit of the lender. Here in Canada there are 3 insurers that can insure your mortgage; CMHC, Genworth and Canada Guarantee. Because of this requirement, there is an extra step needed to receive financing for your purchase. The insurer and the lender are two separate entities and therefore they both underwrite, or in common terms, determine whether the borrower is worthy of financing. There are occasions when the lender has approved financing only to have the file turned down by the insurer. It could be due to a discrepancy on the borrower’s credit, or maybe an issue with the property. Whatever the reason, the insurer does not have to grant approval to financing just because the lender has approved it.
3. An issue with the property – As I mentioned in the previous example the property could be the reason for you not receiving financing. You could be the dream client, with perfect credit, great income and little to no debt. However, if the property you are trying to buy has issues you will not get financing. With a strata property there could be issues with the complex that affect your approval. For instance, if there is an assessment coming due to a roof that needs to be replaced, you might have difficulty obtaining financing if your unit’s portion is going to be extremely high. Or it could be multiple things like new carpeting required throughout and the balconies need to be replaced and new plumbing is needed for the complex too. If these or other repairs are required and come at a hefty price tag, you may be hearing no to your financing request.
4. Low credit score – Two questions may arise for this one. First, what constitutes as a low credit score? And secondly, what affects my credit score? Well let’s briefly cover these questions. The beacon score ranges from a high of 850 to a low of 300. A score of 680 and above is considered an excellent score and grants you access to pretty much all of a lender’s products and the best rates as well. However, a score of 600 is generally the minimum score allowed to be eligible for financing. One thing that can cause you to dip below that 600 score is being late on your payments. If you pay after the due date, or miss your payment entirely, it will affect your score. The longer you take to make the payment the worse your credit will be, to the point where some lenders won’t even consider you no matter what your score is. Another factor that lowers your score is being too close to your credit card limit or even worse, being over it. Being close to your limit shows that you are relying too heavily on your credit for your income level. And if you are over your limit, it just shows that you are irresponsible with your money. Neither is a good situation to be in.
5. You are self-employed – Being self-employed has many benefits. Having the ability to write-off a lot of expenses to lower your income taxes is a big one. However, that does unfortunately come at the expense of getting a mortgage. Not showing a lot of income on your taxes make it difficult to get financing. There is also more paperwork required to prove your income. Lenders want at least 2 years history of your financials. So 2 years of your accountant prepared tax forms, 2 years of business financials, blood from a rock and your first born child! Obviously the last 2 are an exaggeration but the point is clear that it’s a difficult process. And if you are new to the self-employed game, your chances are even slimmer for financing. But as Lloyd stated in Dumb and Dumber, yes there is still a chance!
This is obviously not an exhaustive list of reasons, there are other reasons that you can be turned down for financing. For further explanations and reasoning you will have to contact your reliable, knowledgeable, and expert mortgage broker (me of course!) to provide you with more information.