House shopping is an exciting adventure. It means starting a new chapter in your life for your family and making a new home for yourself. Although it is a time of excitement, it can also seem overwhelming with challenges along the way. For example, what happens if you find out that you didn’t get approved for the mortgage you had applied for? Don’t stress. A qualified mortgage broker can help you sort out your financial hiccup to help you get that mortgage you need, stamped with approval instead of being denied. There can be many reasons why your mortgage application might be rejected but, there are also many ways you can improve your application to better your chances of getting approved for the mortgage you need. Just because you were denied once, doesn’t mean that’s the last word.
First off; what is a mortgage pre-approval?
Houses in the Barrie area typically cost anywhere from $400k to $1.2M. You likely don’t have that money sitting in your back pocket ready to pay in full when you find the home you want to purchase. A mortgage is taken out from a bank or a lender to lend you the money to pay for that house. Then, you slowly pay that money back to your lender over what they call your amortization period. The bank or lender will need to verify your finances to make sure you can afford those monthly mortgage payments. They will look into your financial paperwork, credit rating, and existing debts and cash reserves. Simply put, if they believe you won’t be able to pay your mortgage, you won’t be approved for that mortgage.
A mortgage pre-approval will help you create a financial plan to show lenders you can pay for your new home by providing evidence of your cash flow to cover the regular mortgage payments without maxing out your budget. Your mortgage broker can make suggestions and recommendations as to how much you need for your down payment, how often your mortgage payments should be made each month within your mortgage contract, and how long it will take you to pay off your mortgage. Your mortgage broker can also review your credit score with you and if it’s not where it should be, they can recommend a few ways to either improve it or could look at private lenders you could apply to. Just because the popular mortgage lenders won’t approve your mortgage doesn’t mean there is no hope of securing a mortgage. It just means there is a little more work involved to get you approved. After you get pre-approved for a mortgage you can use that number to start your house hunt so you know what you can realistically afford in terms of budget. There’s no point in looking at houses outside of your budget so, it can also be a time-saver for yourself and your realtor.
What factors influence your mortgage approval?
Debt
Just because you have debt, it does not mean it’s impossible to get approved for a mortgage. However, lenders do look at a number called your debt-to-income ratio. This ratio is the difference between what you owe in debt and how much your income is. This is a big deciding factor in terms of how much you can afford to borrow from a lender for your mortgage. Your lender or bank wants to assure that you will be able to pay them back. But, they also want to make sure you won’t be mortgage broke after making those payments as well. In case you haven’t heard the term “mortgage broke” it refers to having just enough money to cover your house payments without much remaining cash for necessities like food, utilities, and incidentals.
To calculate your debt-to-income ratio, you divide a borrower’s debt payment by their gross monthly income. For example, if you spend $450/month on your car loan, $300/month on your school loans, and you make $4000 monthly, then your debt-to-income ratio would be 18.75%.
($750/$4000) x 100 = 18.75%
Credit Score
Your credit score is an indicator of your financial health. Lenders will look at your score to determine if you can realistically pay them back for your loan in the future. There are many apps out there to determine what your credit score is and recently many banks have built a credit score checker into their banking app on your phone. In general, a credit score of 620 is normally enough to be considered for a mortgage. Anything below 600 means your credit score needs improvement. If you have a low credit score, you can expect a higher interest if you do get approved for a mortgage. The higher your credit score typically the lower your rate. An excellent credit score is between 800-900 and a good credit score is between 700-800.
If you are seeking to secure a mortgage with someone else (most likely your spouse), then the lenders will use whatever credit score is the lowest between the two of you. Keep that in mind if you have significantly different scores because it will increase your interest rates. Sometimes, it may be better to apply for your mortgage as an individual instead of naming both people on the application. For example, if one person has a great credit score of say 750 and the other has a poor credit score of 400, you wouldn’t want to get denied simply because they used the lower credit score of 400 over the 750.
Existing loans
If you have existing loans or loans in the past that you haven’t paid back, that will impact your debt-to-income ratio. Lenders will be looking into where these loans are coming from. They could be for investments or could be your assets like cars, boats, or other properties. Your lender will want to look at these to determine how well you are doing with paying back other loans with the thought process that if you have defaulted on loans in the past, it’s probable that you might default on loans in the future. If this is the case, then they might see you as a higher-risk client to lend to.
Documentation of employment
Your lender will want to make sure you have a stable job to make money to pay back the loan. They will likely ask for proof of income by looking at your paystubs and T4 slips. If you are a business owner or are self-employed they will want to see even more. Typically they will ask for two years of your income tax returns, supporting bank statements and your notice of assessments too, to make sure you not only are making money but, that you don’t owe any back taxes or penalties to the government as well.
Steps to help get your mortgage application approved:
The most important step to improving your chances of getting approved for the mortgage you need is by paying off or eliminating as much debt as possible. Your lenders will view you as less of a risk and will therefore be more likely to approve you for a mortgage if you don’t have debt or at least don’t have much debt. This will bring up your credit score, and bring down your debt-to-income ratio. You may also want to consolidate your debt before applying for a mortgage depending on your situation.
Review your monthly expenses and set a tighter budget for yourself. It may take you a few weeks, 6 months, or even a year to be able to get approved for a mortgage for the house you want. It’s not a race, and if you have a plan, it will be much easier to make it to your end goal of owning a new home.
You could get a co-signer who is someone who agrees to pay back a loan if you do not meet your financial obligations. This person is pretty much agreeing that they trust you and that you will pay your loan payments without issue. If you do not, both of you will be financially impacted. The co-signer must be someone you trust like a relative or close friend. This is a great idea if you fall short in other ways when applying for a mortgage.
Don’t change your employment. Lenders like to see that you have a steady job history knowing that you are always employed. Changing your job often looks like a red flag in not being able to hold a steady financial income stream. If you do change jobs, make sure it’s in the same industry so it looks like you moved on to bigger and better things related to your past job.
Work with an experienced mortgage broker, like myself; Darren Robinson, to help you find the best rates and to increase your chances of getting approved for the mortgage you want. Just because you didn’t get approved with one lender, doesn’t mean you won’t get approved with the next.
With my many years of experience as a financial advisor and a mortgage broker, I can show you all your options to help you make the best decision based on your unique situation. We can take a look at all your financials to calculate how much of a mortgage you can afford, review your credit score and discuss what the interest rate will be. Then, the next steps are in finding your dream home. You can apply for a mortgage online or you can set up a virtual or in-person meeting with me by giving me a call at 705-315-0516. Together, we can improve your chances of getting approved for the mortgage you need to buy your own home. Sometimes, the most important step isn’t searching for the right house to buy – it’s securing the financing you need to purchase your new home, to begin with.