It is the sad reality in our business, unfortunately not everyone who applies, no matter how much they want it, qualifies for the mortgage they are looking for.

Are you gearing up to refinance or buy a home in the next year? These five things may stop your mortgage dead in its tracks. Here’s what you need to know to prevent your loan application from being declined.

1. Your credit score is not what you think it is

This scenario is all too common. Consumers don’t check their credit enough. There could be errors on their report, missed payments that they didn’t even realize they’d missed. Even the small things, if there is enough of them, add up to a big thing.

Carrying debt at or above your limits, which happens once they’ve charged interest on an at limit credit card, severely impact your credit score. You should strive to keep your balance at no more than 75% of the limit, preferably less than 50%.

Credit reporting agencies also have different algorithms for their consumer facing report and their lender facing report so not only do they look completely different, the score can be different as well. Sometimes this works out in the consumer’s favour, but not always.

So while it’s important to keep on top of your credit scores, especially when you’re preparing to buy a home, know that they can and do fluctuate, and that what a lender sees may differ somewhat from the scores you see.

Just to give you an idea of what is a good credit score, any score over 680 (the scale ranges from 300-900) is considered good. From 620-680, we would need to see what is on the credit report and see if we can employ some strategies to increase your score over a few months. Below 620, your file may still be doable but it’s more likely to be done by an Alternative Lender meaning that you’ll need a larger down payment.

2. You don’t have job consistency or you’re on probation

Proving employment in the same industry with no probation at your current job shows the lender you’re a better credit risk. When you apply for a mortgage, lenders want to see a two-year employment history.

If you’ve just graduated from school and we can show that your probationary period has ended, provided you’re salary not hourly or contract, this is one rule we can typically get beyond. If you’re hourly, contract or self-employed this gets more difficult.

If you have have a history of working in the same field and/or in the same role within your occupation, we may be able to overcome these roadblocks.

3. Your income is not straightforward

This is especially true if you are an hourly employee and changed jobs in the past 24 months. The lender will have to average your income over the last two years using the gross income you have claimed with the CRA. This averaging might give you less money on paper to qualify than what you otherwise actually earned (ie. when there are tips or other cash payments that are not disclosed to the CRA).

A history of earning an hourly wage will become a critical component of how your hourly income will be averaged. Do you have overtime? You’ll need at least a 24-month history of earning that overtime income if you need or want the income to qualify. Same thing for bonus or incentive income – 24-month history.

Do you work more than one job? You’ll need a 24-month history of working two jobs together simultaneously for both incomes to count.

Do you work for your family’s business? Your income will be derived from the most recent two years of tax returns. In most of these scenarios tax returns will be what the lender uses to qualify you.

Be forthcoming with your lender about your income, what your compensation structure is like, how it works, how frequently you are paid, and what annual bonuses and/or additional compensation you receive. This helps your loan professional pragmatically put together a loan scenario for you that will have the underwriter clamoring for more borrowers like you.

4. You don’t have enough cash to cover closing costs

Gone are the days of 100% financing. Want to buy a house today? Be prepared to spend the full down payment plus closing costs. Don’t have it? Gift money is always a possibility.

Most mortgage loan programs want at least a blood relative donating the funds, although exceptions can be made depending on the lender and the program.

Other cash-to-close issues arise when there is no way to document deposits going into a bank account and unfortunately the lender must ignore those monies. If the money cannot be paper trailed, you could have trouble wrapping up your transaction. Remember: If you can’t document it, you can’t use it. A good rule of thumb is the money has to be an account for 90 days, regardless of whether it’s a bank account, RRSP account, investment account etc., unless you have a paper trail of where it came from.

In Alberta it used to be that all lenders wanted you to prove at least 1.5% of purchase price for closing costs. With the many restrictions place on the mortgage industry in the last 2-3 years, many lenders have decreased that amount in Alberta because we don’t have land transfer tax here. However, be prepared to show 0.5%-1.5% in closing costs depending on the lender.

5. You’re living beyond your means

The old saying “Robbing Peter to Pay Paul” applies here. Living your life on credit, spending beyond your means and carrying big debt substantially reduces your mortgage and homebuying chances. It is unfortunately that black and white.

Payments on car loans, lease payments, student loans, personal loans, lines of credit, credit cards, child/spousal support etc. — all of these things count against your borrowing strength for a mortgage.

The payment amount for unsecured lines of credit and credit cards has to be calculated at 3% of the balance, regardless of the minimum payment amount. This can greatly reduce your purchasing power.

Know this: When a mortgage company grants you a loan, it’s not a loan against the house, it’s a loan against your income. The more loans you have against your income before a mortgage is counted against how much mortgage you’re able to take on. If your income is a free and clear of debt, your borrowing strength increases, and your ability to manage a mortgage payment greatly increases — not only from a qualifying standpoint, but as good measure of personal finance.

 

Before you go the bank, come talk to me and I can educate you on where the risks lie in your particular scenario. This way, there’s no wasted time!