At Centum Mortgage Store, Ltd., our goal is to help you find the right mortgage option for your situation and successfully apply for it. Naturally, a key part of that process is filling out and submitting a mortgage application. In this article, we’ll be going over some of the potential red flags that lenders watch out for on these applications so that you can be better prepared for this process and what the worst-case scenario might be. Of course, we can help you work out a deal that works for your particular situation, so don’t let this list deter you from trying to get the best possible deal.
- Low Credit Score- The first possible red flag on a mortgage application is a low credit score–usually any score below 680 on the Equifax scale will make it more difficult to get your loan approved, and even then, it will likely have a higher interest rate. Ideally, you should have an Equifax score of 720 or above to have the best chances for approval and access to the lowest mortgage rates. Again, we will work with you to determine the best mortgage option for your financial situation.
- Too Much Debt for Your Income- Something else that lenders look at on your mortgage application is the balance between your current debts and your current gross income, also known as your Total Debt Service (TDS) ratio. To calculate this ratio, your monthly debt obligations, such as car loans, student loans, and minimum credit card payments, are totaled, then divided into your gross monthly income to yield a percentage. For example, if you have $2,500 of monthly debt and $7,500 in monthly income, then your ratio would be approximately 33 percent, well below the 44 percent cut-off that most lenders use, but you can only go that high if your credit score is above 720. You may be able to go as high for a score of 680, but that is dependent on the info in the credit bureau. Lower it’s 40%. In Canada, there is also a GDS – Gross Debt Services ratio calculation as well that must not be exceeded. The highest is 39%.
- Large, Last-Minute Purchases- Another common red flag in the mortgage application process is making large purchases after you submit your application but before it has been approved. For example, if you submit your application showing that you have a debt-to-income ratio of 42 percent, just below the typical 44 percent limit, then finance a new car before the application is officially approved, this purchase could raise your debt-to-income ratio to above that crucial limit and put you in danger of rejection, which is why we advise all our clients to stick to their regular spending habits and not make any significant purchases while their application is being considered.