When it comes to shopping for a mortgage, it’s important to know what you need to qualify – However, it’s just as important to understand some of the reasons you don’t qualify. This will allow you to make some changes and budget accordingly for when the time is right.
If you are in the market for a home, here are five major reasons why you may not get approved for a mortgage:
1. Too Much Debt
To begin with, one of the biggest reasons that people fail to qualify for a mortgage is because they are carrying too much debt. This debt can be in the form of credit cards, lines of credit or other loans. Regardless of where it comes from, it all contributes to your Total Debt Servicing ratio (TDS). Ideally, your monthly debt payments should NOT exceed 40% of your gross monthly income.
PRO TIP: Find ways to lessen your expenses and consolidate debt where possible.
2. Credit History
Secondly, people may not qualify for a mortgage because of their credit history. It is important to pull your credit score before you start house hunting so that you can determine the amount you qualify for. Credit scores are a direct reflection of potential risk and if you have a poor credit history, it makes it harder to secure a loan.
PRO TIP: To improve your credit score be sure to avoid late or missed payments and don’t exceed your credit card limit or apply for multiple new credit cards.
3. Insufficient Assets or Income
With rising housing prices and stagnant income levels, one roadblock to mortgage approval can be a lack of sufficient income.
4. Not Enough Down Payment
Another reason you may not qualify for a mortgage is not having enough of a down payment. In Canada, a 20% down payment is required to avoid mortgage default insurance. However, you can still purchase a home, you just need to account for the insurance premiums. These are calculated as a percentage of the loan and based on the size of the down payment.
5. Inadequate Employment History
Lastly, employment history can have a big impact on your mortgage approval. Most lenders prefer a two-year consistent employment history so if you do not have this, you might find it harder to get a mortgage loan.
Whether you’re looking to get your first mortgage or just simply shopping around, understanding what can impact your application will help ensure you have greater success.
If you are currently struggling with your mortgage approval or have recently been denied – that’s okay! With a little effort and patience, as well as the support of us, you will be able to put yourself in a better position to reapply in the future! If you’re ready, contact us today to discuss your options.