Why Is It Harder For Me to Get a Mortgage?

Stricter mortgage regulations imposed by the government could make it harder for you to get a mortgage. Under the new rules, banks are required to increase the amount of capital they are holding to back mortgages that are presently in the market.

What this means for homebuyers is that it could become harder to be approved for a mortgage. If they are approved for a mortgage it could be for less than they expected or come with higher interest rates.

In concrete terms, what are the factors that could affect whether or not you qualify for a mortgage?

Not Having A Big Enough Down Payment

In order to qualify for a mortgage under the new rules, you will need to put down at least 5% if you are buying an owner-occupied property and 20% to purchase a rental property.

If you can only afford less than 20%, the federal government mandates that you purchase Mortgage Default Insurance from CMHC – In addition, the loan can be amortized only over a maximum 25 years. However, for homeowners able to put down more than 20%, the amortization period can be up to 35 years, at the lender’s discretion.

Not Enough Income

Under the new rules, you are limited to a Gross Debt Service ratio of around 35% to qualify for a mortgage. GDS refers to the percentage of your income devoted to meet monthly housing costs, including repayment of the principal plus the interest on the mortgage, plus property taxes and heating costs. If your GDS ratio is higher than the standard, you may not qualify for a mortgage.

Too Much Debt

Another ratio that mortgage lenders may take into account when making their decision is the Total Debt Service ratio. The TDS ratio refers to the percentage of your income that is needed to service your debts. At present, this ratio should be no more than 42 percent.

In addition to the above factors, mortgage lenders also consider your credit history and employment history when making their decisions.

If you have a poor credit score, then you may be turned down for a mortgage. Factors that can hurt your credit score include not making your monthly credit card payments on time, exceeding your credit card limit and applying for additional credit cards. If you have been late in paying your bills or fines such as parking tickets, and these have been sent to a collection agency, it will also affect your creditworthiness.

To ensure that you have the capability to pay your debts, lenders will usually want to see that you have a consistent employment history that goes back at least two years. If you are regularly employed, then you have sufficient income to service your mortgage. In order to provide proof of employment, you may be asked to submit a Job Letter that includes details of your salary.

The above are the most common reasons why you might be turned down for a mortgage. To increase your chances of success, you should consider which of these factors applies to you so that you can correct them.