Reasons Why Homebuyers May Not Qualify for the Best Rates

When homebuyers plan to purchase their first home, most borrowers feel confident visiting a mortgage broker and obtaining the lowest rates they’ve seen online. However, in some situations they can face disappointment when they are not able to qualify for the best rates. The following are some of the reasons why homebuyers may not qualify for the best rates.

Consumer Debt

Consumer debt is one of the biggest reasons why homebuyers are not approved for the best mortgage rates. This is because if a borrower has a high debt payment such as auto or credit card payments, it will decrease their borrowing power.

As an example, the borrowing power of a borrower can substantially decrease if they have a $400 car payment and $10,000 worth of debt on their credit card. Moreover, borrowing power is also dependent on the income of the borrower, the impact of income on debt-to-income ratios, including Gross Debt Service Ratio (GDSR) or Total Debt Service Ratio (TDSR). These ratios provide the lender with an estimation of how the borrower is able to balance their debt and their income. The maximum GDS ratio must be under 32-39%, consequently, TDS ratio must be below 40-44%, depending on the lender.

Price Increase

In most circumstances, homebuyers frame their price expectations based on the people who have recently purchased a house, specifically those with a similar financial profile. However, because of the current housing market condition, such expectation may not always provide an accurate anticipation of the market.

As an example, if a friend has purchased a house in the last 6 months, the cost of that type of home would have increased significantly because of current market conditions. Hence, the chances of the borrower being approved for a mortgage based on previous expectations would be slim, even though they have the same income and debt levels.

Inconsistent Income

When applying for a mortgage, lenders always assess the income level of the borrower so that they know that the borrower will ensure timely payments. Moreover, borrowers who have guaranteed work hours have greater chances to be able to qualify for a mortgage. The key factor to note is that the borrower must have guaranteed work hours because even if the borrower is working regular full-time hours, unless those hours are guaranteed, the lender cannot include the full income and will require a 2-year average for qualification purposes.

Self-Employment

Borrowers who are self-employed have a higher gross income as compared to their declared net income because of how their taxes are filed and their write-offs as well. Although write-offs can be preferable for reducing income and associated taxes, it is not beneficial for a mortgage application because it also reduces the amount of income that can be used by the borrower. This indicates that the borrower may not qualify for the expected amount based on their gross income level. However, most lenders offer an income “gross-up” of up to 25% of their net income as shown on their T1 General.

Government Income Inconsistencies

It is important for borrowers to ensure that their mortgage application is not heavily reliant on government subsidized income source such as child tax benefit. In such circumstances, the borrowing power of the borrower with decrease because lender will not want the child benefit tax to represent major portion of their income. Government-related income can also be inconsistent for lenders when they are looking for prior years of income to determine future loan repayment abilities of the borrower. Such example would be if the borrower has a Canadian Emergency Response Benefit (CERB) payments included as part of the income of the borrower. Lenders will not use CERB income for the purpose of mortgage qualification and will assess their income by deducting the CERB money.