Other issues that affect your mortgage qualification

While credit, debts and income have a major impact on your ability to obtain a mortgage, there are other issues that affect your eligibility. Learn what to consider before applying for a mortgage.

In a previous blog, I discussed the impact of your credit history, current debts, and your income on your ability to obtain a mortgage and the amount that you can afford. I will now discuss other key issues that you will encounter when applying for a mortgage.

Save for your down payment

You will require at least five per cent for a down payment plus a further 1.5 per cent for closing costs. Most lenders prefer that you have these funds in your bank account for at least 90 days. Unfortunately, real estate is becoming a major target for money launderers and the lending industry is being cautious. If you have money coming in within the last 90 days, you will need to provide additional documentation showing the source of those funds, including gifts from family members, tax refunds, and sale of items.

A common issue I encounter with clients is that they do not have a down payment saved but they still want a house. One exercise I challenge my clients with is to compare the cash flow differences between renting and owning a house. Assuming that you factor in all home ownership costs, especially regular maintenance and repair estimates, the cash flow required to own a house is typically greater than renting. I then challenge clients to assume that they put this cash difference into a savings account every month. First, it will prepare them to be able to live within their financial means as if they have already bought the house. Second, they will quickly be able to save up the down payment, making their dreams of home ownership become a reality sooner.

To further accelerate savings, I suggest that clients use this monthly savings to invest in an RRSP, assuming that there is contribution room. As long as the funds have been within the RRSP for 90 days and the client has not owned a home in the last five years, up to $25,000 can be withdrawn for a down payment without triggering taxes. The client will then have the next 15 years to repay the RRSP. Using this strategy will provide additional short-term tax savings that will accelerate your down payment savings plan.

Other issues that can affect your eligibility

There are a number of other factors that could affect your eligibility. These could include the following:

  • Do you have to make support payments? These amounts are typically treated as the equivalent of monthly debt payments.
  • Have you been bankrupt? Some lenders will not work with bankrupt individuals for seven years after the discharge.
  • Do you have non-taxable income? Depending upon the lender, some will use these income sources and some will not. Additional documentation will likely be needed.
  • Have you co-signed other people’s debts? Even if the debt is not yours, lenders will treat any co-signed debt as if it is 100 per cent yours, including the monthly payment.
  • Are you a small business owner who has been focused on tax planning to keep your annual tax bill low? If your taxes are low, your mortgage eligibility may be just as low. You may need to report higher income on your tax return and pay more taxes over the next two years to afford a mortgage.

Do you pre-qualify?

Once you have gone through all of the previous steps, one of the final questions is do you pre-qualify. Many realtors will ask for this even before they are willing to work with you. You need to understand clearly what your lender means when they pre-qualify or pre-approve you for a mortgage. Some loan brokers will work with your information and do an estimate of what you will qualify for. This is an informal estimate but is usually a good approximation. The advantage of this approach is that it allows the broker to shop around for rate specials with any lender once you actually make an offer on a house. As part of this estimate, you will usually be advised of potential issues with your information and suggested actions to correct these issues. 

Many lenders will allow you to be pre-approved; however, at the time of the house offer, they can still turn you down. A pre-approval is usually based on your listed income and your beacon score only, and is issued within minutes of sending in the application. The key advantage is that the lender will lock in the interest rate for 90 or 120 days. The disadvantages are that a pre-approval interest rate is typically higher and that most lenders do not do any underwriting until you actually submit an offer on a house. At that time, they will scrutinize your information and, if they find any details that they do not like, they can still turn down your application.

If you want to be certain that you are pre-approved based on all of your information, you need to ensure that you work with a lender that is willing to do full underwriting up front. Only a few lenders do this. Keep in mind that even with full underwriting, your application may be rejected if the house that you choose to buy does not meet their requirements.

Between this blog and the previous blog, you now have a good understanding of what determines your mortgage eligibility and how much you could qualify for. The key to the house purchasing strategy is to start preparing early, address any issues that you can identify, and start making adjustments now. This will then allow you to achieve your dreams of home ownership.

Keep the conversation going

Have you encountered other issues in qualifying for a mortgage or dealing with lenders that you could have addressed with more preparation beforehand?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Brian Ludwig

Brian Ludwig is a Chartered Professional Accountant, an Accredited Mortgage Planner and a Certified Financial Planner working within his public practice in Regina.