Everything you have heard about how home mortgage interest rates are increasing is true. However, you are in the market for either a new mortgage or a home equity line of credit (HELOC). As you start the application process you are wondering what would the bank consider as grounds to deny you this loan. Here are some answers.
The Importance of a Clean Credit Score and History in Mortgage Approval
One of the reasons could be your credit score and credit history. Banks follow very strict rules about what they will or will not consider good numbers. If your information does not fit within those stringent rules, you will not be granted a loan. The minimum score is 650, with an absolutely clean slate. That means no late payments on an existing or previous mortgage, nothing in collection by other creditors, no bankruptcy filings nor consumer proposals.
Property Condition and Location: Key Factors in Mortgage Approval
The next stumbling block will be the condition and location of the property. The evaluators will consider the condition of the structures and outbuildings. They want the buyer to choose a home that is in good living condtion and has been well maintained. It is expected that there will be a few tweaks, but a true fixer-upper is not very likely to be approved. If the buyer defaults on the loan payments and the bank forecloses, the officers view this as a property that would not likely be re-sold and the bank is stuck with a mess.
The location of the proposed purchase needs to be in an urban area, preferably some decent neighbourhood. If the property is rural, it needs to be located no further than 15 minutes driving time from a city that has a population of at least 20,000 people. Again, that is so the bank won’t get stuck with a piece of real estate that they won’t be able to unload if the worst happens.
Understanding Debt Ratio Limits and Their Impact on Mortgage Approval
Another thing the lending committee will consider is the debt ratio. They will check out both the gross debt service (GDS) and total debt service (TDS). GDS is the percentage of the annual household income that will be allocated to the cost of housing, which will include utilities, insurance, etc. The TDS is that housing cost plus all other debts, like car loans, student loans, credit cards, and so forth. The GDS may not exceed 39% and the TDS can’t go more than 44%.
For buyers who are still hoping to seal the deal, they will often ask for a co-signer. However, it is easy to forget that the co-signer must be within those debt parameters as well, which can create difficulties.
As a final element, in Canada, banks will look at the stress test. This is a ratio that looks at the contract rate plus 2% (or the highest rate of 5.24%). So, with a fixed-rate mortgage of 4.89%, where it is now, the borrower must qualify for 6.89%. This generally means a reduced amount of money offered as a mortgage on a piece of real estate.
Yes, interest rates are high, and qualifications can seem stringent, but that doesn’t mean game over. There are a variety of lenders available who have their own guidelines that can help home buyers and investors complete their dream transactions.
If you’ve been denied a bank mortgage or are worried that you won’t meet their strict criteria, don’t give up on your dream of owning a home. There are a variety of alternative lenders available, and our team at easyhouseloan.ca can help you explore your options. Contact us today to learn more about how we can assist you in securing the financing you need to make your home ownership dreams a reality.