It’s no secret that the home buying process can seem stressful. Between dealing with your lender, REALTOR®, lawyers, appraisers, you name it, there’s so much that needs to be done.
There’s also a lot that can go wrong if you’re not careful. While your mortgage is in the capable hands of professionals, it’s always a good idea to stay involved in the process and not make any assumptions. Let’s take a look at a few reasons you may not be approved for a mortgage as well as some common barriers that can result in a purchase falling apart prior to closing.
Common Reasons Why You May Not Get Approved For A Mortgage
When your mortgage application gets submitted, it’s sent to an underwriter who sifts through a lot of data before arriving at a decision to approve or deny. While everyone hopes their mortgage is approved, this isn’t always the case. If your mortgage application is denied, chances are it’s due to one or more of the following reasons:
Poor Credit History
It should come as no surprise, but if you’ve had credit problems in the past – including a history of late payments or something more serious, like bankruptcy or consumer proposal – you may have difficulty getting approved for a mortgage. It’s best to tackle this issue head-on and start by getting prequalified through a mortgage broker, who has access to dozens of mortgage lenders.
Too Much Debt
Even if you have a stable, full-time job, you may not be able to service the amount of debt you’re requesting. Your lender uses debt servicing ratios to determine what’s affordable. If you don’t meet the standard, you won’t be approved. As a general rule, your monthly housing costs shouldn’t exceed 32% of your gross income, while your total monthly obligations, including other debts, shouldn’t be more than 42% of your income.
Lack Of Income/Job Stability
Even if your income is high enough to service the mortgage debt, your lender may not deem your income, or your job, to be stable enough to warrant approval. A brand-new job, contract work, fluctuating income and seasonal employment require enhanced diligence when a credit decision is being made and could be a barrier to approval.
Insufficient Down Payment
Most people know that you need to have a down payment to buy a house. However, they don’t always know how much they’ll need, or what’s considered to be an acceptable down payment source. A down payment can’t come from borrowed funds, and you often must prove that the funds have been available at least 30 days prior to approval. If your down payment source doesn’t qualify, you may not qualify for a mortgage.
Common Hurdles To Your Mortgage Closing
Even if your mortgage application is approved by your lender, based on your employment, income and credit history, a number of barriers remain that could stand in your way of closing on the home. It’s important to be aware of these so that you can plan ahead and be ready to respond if a hurdle comes up.
The Appraisal Comes In Low
Once your mortgage application has been approved, chances are your lender will request an appraisal on the home you’re purchasing. An appraisal is the bank’s way of ensuring that the value of the home matches the price you’re paying for it. Sometimes, the appraised value comes in low. This doesn’t necessarily mean the deal is off, but you may be in a position where you’re forced to go back to the seller and try to renegotiate the purchase price or be willing to increase your down payment to bridge the equity gap.
The Home Doesn’t Meet Lending Guidelines
All mortgage lenders have minimum guidelines that a property must meet to qualify for mortgage financing. While it varies between lenders, it usually involves minimum square footage, property location and property type. For example, if a home is well under 1,000 square feet, it may not meet conventional lending guidelines.
Instead, the lender may require that the mortgage be CMHC-insured, regardless of the down payment amount. If a property is in a remote location or is designated as recreational, like a cottage, it may not meet guidelines and the deal may have to be cancelled. Often, this isn’t known until an appraisal is completed and after your initial mortgage application has been approved. The reason lenders have these guidelines is to ensure that a house is marketable should they need to foreclose.
Problems With The Home Inspection
A home inspection isn’t the same as an appraisal. While an appraisal assesses the overall market value of the home, a home inspection involves a licensed inspector touring the home and checking on all its major systems and structures. A home inspector will look at the roof, windows, heating and cooling systems, plumbing and electrical, ensure that the foundation is solid and search for any evidence of mold or water damage. It’s highly recommended that buyers include a satisfactory home inspection as a purchase condition. If a home inspection uncovers a major problem that’ll be expensive to fix, the buyer has an opportunity to get out of the purchase contract.
Errors That Cause Delays
When you buy a home, there are many places where errors can occur. While you’re dealing with professionals along the way, they’re also human and sometimes make mistakes. While an error made by the lender or the lawyer won’t often result in the house purchase falling through, it could result in delays and cause the closing date to change. Make sure to always ask lots of questions and stay informed in the process. By doing so, you may be able to spot a potential error before it occurs.
Condition Isn’t Satisfied
When you enter a contract to purchase a home, there are a series of conditions attached to that offer. If for any reason a condition is not met, the purchase can fall through. Some conditions favour the buyer, such as financing, a satisfactory appraisal or home inspection. The seller can include their own conditions as well.
One condition we haven’t covered but is often the cause of a deal falling through involves the purchase or sale of another property. If the buyer hasn’t yet sold their existing home, they’ll usually include a condition granting them a period of time in which to sell their home. If this deadline passes, a decision must be made. The buyer can ask for an extension, but typically the seller will invoke a 48-hour clause. This means that the deal is still on, but if another offer comes forward, the buyer has 48-hours to sell their home or the seller can accept the other offer. This occurs fairly often, especially in a slow real estate market.
Final Thoughts On Avoiding Mortgage Barriers
As you can see, there’s a lot that goes into buying a home and getting your mortgage approved. Our best advice is to start by getting prequalified through a mortgage broker or your lender of choice. From there, make sure you stay informed by asking lots of questions. The more you know, the less likely you’ll encounter problems. And if and when you do, you’ll be ready.
Tom Drake is an authority in Canadian personal finance. He is a financial analyst and has been writing about personal finance since 2009 at the award-winning MapleMoney. His work has appeared in MintLife, Canadian MoneySaver, and U.S. News & World Report, and has been quoted in The Globe and Mail, Yahoo Finance, and Financial Post.