If you find that you are currently unable to qualify for the mortgage amount you want, there are steps you can take to improve your situation and possibly increase the amount that you may qualify for.
The first step is to identify the obstacles to approval and to pinpoint the areas that need improvement. From there, we can develop a plan to overcome those hurdles. Here are some tips for improving common barriers to mortgage approval:
Income and debt
If your debt ratios are the problem, there are two options for you: increase your income or reduce your debt. One way to increase your income may be with the assistance of a co-signer. By having someone co-sign for you, you may be able to include their income when calculating the debt service ratios. To reduce your monthly debt load, you could arrange a debt consolidation loan. Ask me if this may be an option for you.
Ensure that you always make at least the minimum payment on all of your bills. Every late payment that is recorded on your credit bureau report has a negative impact on your rating. If you need to rebuild your credit, talk to me or your banker for advice. An RRSP loan or a secured credit card is an easy way to start re-establishing your credit. Credit counseling services can also be of assistance when trying to repair or rebuild your credit.
A down payment is the amount of money that you pay at the time of purchase toward the price of your home. Your mortgage loan covers the rest. You should have a good idea of how much you can put toward the down payment before talking to a potential lender or mortgage broker.
The minimum down payment is at least 5% of the purchase price. For example, to buy a home that costs $250,000, you will need a minimum of $12,500 as your down payment.
When you are ready to make an offer to buy a home, you will need to provide a deposit. The deposit forms part of your down payment, with the rest to be paid when you “close” the purchase of your new home.
In some cases, the minimum down payment can be higher than 5%. For example, if you are self-employed or have a poor credit history, you may be required to provide a higher down payment. You may be able to use additional funds from your RRSP for your down payment with the Home Buyers’ Plan (HBP).
Canada’s Mortgage Stress Test
Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced a stress test on mortgage lending in October 2017. This rule, which requires all Canadian buyers borrowing from a federally regulated lender to pass the stress test, came into effect as of January 1, 2018.
The stress test requires that all borrowers be measured against the minimum qualifying rate which is either the Bank of Canada’s five-year benchmark rate or their contractual rate plus two percentage points; whichever is greater of the two.
In financial terms, a stress test is defined as a process by which a financial institution can determine the worstcase scenario for any investment. For mortgages, it means a stress test is used to determine the risks associated with each loan application. Lenders look at how much the borrower can afford given their current debt-to-income ratio and assess whether they would still be able to make the monthly mortgage payments should the rates increase.
It is very important potential home buyers consult with qualified mortgage professionals such as myself to ensure you are informed on changing government rules relating to mortgage qualification.
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors