Factors Affecting Your Mortgage Application
Simply put, there are three main factors that lenders consider when deciding on your mortgage application.
Income – Can You Pay for the Loan?
Your income determines your debt service ratio. That is, how much of your income goes into servicing all your debt payments. The government has set maximum allowable debt servicing ratios, so ultimately you won’t be able to get a mortgage that you won’t be able to pay for.
Income requirements are very strict, and normally only very specific documents are allowed in calculating your total income towards your application. Lenders are very specific as to what they will consider usable income versus unusable income. For example, lenders will not consider income from cash jobs, nor will they consider income from contract only positions. Also, if you just got your job you may have to wait for your probationary period to finish prior to being approved for a mortgage.
Downpayment – What Can you Put Towards your Purchase?
The minimum required downpayment in Canada is 5% of the total purchase price. Lenders also look at the source of your downpayment, such as if its from your savings, a gift from family, or borrowed off a line of credit. It’s not a good idea to plan to borrow your downpayment as lenders are quite strict for this type of downpayment, and extremely difficult to obtain an approval.
Credit Score and Current Debts
Your credit score is based on your current borrowings and repayment history. The lenders use your credit score to determine your creditworthiness. Essentially, how you have managed your credit in the past helps the lender determine if you should also get a mortgage.
Your credit score is based on many different factors. Your loan and credit card repayment history, your total current borrowings, and how many inquiries you have on your credit bureau all factor into your score. The higher your score, the better chances you have. The lower your score, and you may have problems getting an approval. Generally, the lenders will want to know why you have a low credit score, and how you might change that trend moving forward.
The lender will also consider what you are borrowing at the time of your application. If you are carrying a balance on a credit card or line of credit, the lender will add a payment in for those balances which will increase your debt servicing ratio. If you have a car loan or personal loan the lender also adds in those payments.
Have further questions about the factors that affect your application? Please contact us by email or phone to discuss. We are happy to speak with you directly about your specific situation.
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