If you are looking for a mortgage, you probably already know just how important credit scores are (if you have been following me, you definitely would know). However, a low credit score is not the only reason lenders might reject your mortgage application. Here are five key factors that may prohibit you from qualifying for a mortgage.
1. Undocumented income
Banks will not approve for a mortgage when borrowers cannot prove their income through documentation. When you are applying for a mortgage, you will be requested to provide a copy of your most recent Notice of Assessment from the CRA, at least 3 months of bank statements, T4’s, job letter and most current pay stub. Lenders will want to verify that your income is what you say it is. They might also call your employer to verify the information. Lenders will also want to determine if your income is consistent from one year to the next. If documentation cannot be provided, a decline will definitely occur.
2. Too much debt
Lenders will not want your debts to consume too much of your monthly income. That is why you will usually need a Total Debt Servicing (TDS) ratio of 42% if you want to qualify for a mortgage. A 42% percent TDS ratio means that your monthly debts - including your estimated monthly mortgage payment, credit cards, student loans, and auto loans - must equal no more than 42% of your gross monthly income.
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3. Bad credit
When deciding on who qualifies for a mortgage, all lenders will look closely at your credit score and credit history. Lenders consider a FICO credit score of 740 or higher to be an excellent one. Though it is possible to qualify for a mortgage loan insured by the Federal Housing Administration, (AKA-FHA mortgage or high ratio mortgage)- with a FICO credit score of 650. If your score is below 650, expect a decline on your application, unless of course you have 20% for a down payment. Before you set up an appointment to discuss your mortgage options, you should review your credit report in advance. You can do a self-pulled report through Equifax.ca.
4. A shaky employment history
If you have struggled to hold onto one steady job during the two years before applying for a mortgage loan, do not be surprised if lenders reject your application. Lenders do not want to lend money to borrowers who have a history of moving from job to job. They want to know that their borrowers will be making the same salary one year from now as they are on the day they filled out their loan applications.
5. A small down payment
Minimum down payment for all borrowers must be 5% of the property purchase price. That being said, if the qualifying ratios are higher even with 5% down payment, you will not qualify for a mortgage. This can be offset by putting a larger down payment to decrease the ratios. Yes, easier said than done, but, it is just how the process works and knowing is half the battle.
Best advice I can give to anyone who is looking to purchase a property, whether you are ready today or will be ready in the near or far future, is to know the mortgage process and all that is involved. There are many variables when it comes to qualifying for a mortgage and the best way to learn is to talk to a mortgage agent - a good one. An agent that will take the time to discuss and disclose all details that are involved, will give you their time to educate you and prep you for that big purchase -
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