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As a homebuyer pursuing a mortgage from prospective lenders, how do the professionals determine what you are pre-approved for?

You Need a Pre-Approval

When it comes to affording and purchasing a home, individuals require a pre-approval from a bank or other credible financial institution. Lenders determine how much they deem you can reasonably pay based on a number of factors. While it may be mysterious to some, the general principles of income and assets play an important and obvious role. So how do the calculations actually work?

The Mortgage Paperwork

Someone applying for a mortgage pre-approval must provide a range of documents, including paystubs and T4s, employment and financial account information, proof of assets and liabilities, and from where you can take money for your down payment. A financial institution or other lender will also research your credit score. Once approved, experts recommend for prospective buyers to purchase a home below the maximum amount with which they are presented.

Lenders are Risk Averse

The figures you receive during and after a pre-approval meeting consider various parts of your financial past and present. In addition to your income and assets, lenders take into account your current debts and credit, not to mention the costs you will be paying for and at your new home. That includes the purchase itself, but also heating costs, condo fees (if applicable), and property tax.

Make Yourself Attractive to Lenders

Essentially, the more you earn and the better your credit, the more stable of a position your lenders will perceive you to be. The fewer debts and liabilities you have, the better. Everything is taken into account for such a significant purchase like a home. In Toronto, the average detached property is valued at over one million dollars, after all.

If you are wondering how you may be able to boost your rate, simply maintain your good financial health and avoid frivolous spending. Find a better paying job, pay your credit cards on time, pay off your student loans, and ensure a spouse or partner you will be purchasing the home with has a solid financial reputation, as well.

It’s pretty common to hear about homeowners being rejected for a home equity loan when they have bad credit. But did you know that you can still be rejected for a home equity loan even if you have good credit?

Good credit can help you qualify for a mortgage, but it doesn’t mean you’ll automatically qualify for a home equity loan. While a good credit score is one indicator that shows lenders there’s a good chance you’ll be able to pay the loan back, it’s not the only thing they look at. Below are just some of the reasons why the big banks and trust companies could reject your home equity loan.

Income vs. Debt Ratio

When you qualified for a mortgage you likely had a good credit score and probably low debt levels. But circumstances can change quickly. Racking up unexpected debt and a change in your income level could be one of the reasons why your home equity loan was rejected.

When you apply for a home equity loan with a traditional lender, they look at how much you earn and how much debt you have. This helps them decide whether or not you can afford a new loan.

On top of that, traditional lenders have minimum and maximum requirements for income and debt. If you don’t meet that threshold, you’re going to get rejected. For most traditional lenders, the debt-to-income ratio is 43% to 49%. That ratio is the percentage of monthly gross income that goes toward paying your debt.

Unreliable or Low Income

How much you make doesn’t impact your credit score. It can, however, get in the way of obtaining a home equity loan. If your job situation has changed and you make less than you did before, your loan application could get rejected.

You could face the same challenges if you’re self-employed too. A lot of Canadians are entrepreneurs, and that’s an issue for traditional lenders. Over the last number of years, Canada’s big banks have implemented a number of strict lending rules that put self-employed Canadian homeowners at a disadvantage.

In the past, self-employed Canadians and those with unreliable, inconsistent income simply had to state how much they made. Not anymore. Now they have to prove it.

If you’re self-employed, you understand that, for tax purposes, you might draw a smaller income. That decision will come back to haunt you if you use a traditional lender for a home equity loan.

If you’re self-employed you also know that income streams can be unreliable and inconsistent. That too could be why you were rejected for a home equity loan.

A Foreclosure or Bankruptcy

If you’ve filed for bankruptcy or experienced a foreclosure, it will impact your credit score for six years from the date your bankruptcy was completed. If you’ve filed for bankruptcy twice, it could last on your credit report for 14 years.

That means, that even after you’ve recovered from your bankruptcy and repaired your credit score, traditional lenders could still decline your home equity loan application.

FAQ’S about Mortgage Declined with Good Credit Score

Q. What is a good credit score for getting a home equity loan?

The credit score requirements for a home equity loan vary depending on the institution and amount. The bigger the lender and loan, the stricter the lending rules. Credit scores (300 to 900) show how likely you are to pay your bills on time. The higher the score, the lower your odds are of defaulting. To get the best rate, some lenders insist on a minimum score of 680.

Q. Does being denied a loan affect my credit rating?

No. Being denied a home equity loan will not negatively impact your credit score. Your credit report will show that you made an application, but it doesn’t show if your application was approved or denied. In fact, no borrower can access that kind of information.

Q. Doesn’t checking my credit score impact my credit score?

Yes and no. There are two different types of inquiries: hard and soft. A hard inquiry is made when you apply for credit or a loan. A soft inquiry is when you request a copy of your credit report.

With a hard inquiry, a lender looks at your credit score and determines whether or not you will be able to make the monthly payments. The inquiry only includes the name of the lender that checked your credit and the date of the inquiry. It does not show whether you were approved or not.

Your credit score can be affected by the number of recent inquiries. Each new inquiry that occurs over a short period of time can knock a few points off your credit score. That only happens because it shows you are trying to take on new debt.

Being docked a few credit points is not as dire as it sounds, and it disappears over the course of a few months.

The only way it could affect your credit score is if you make a lot of loan inquiries over a short period of time. Applying for a home equity loan with a number of lenders could make you look like a credit risk.

Canadalend.com, Helping Canadians Secure Home Equity Loans

If you have good credit and have been denied a home equity loan, contact a mortgage expert at Canadalend.com. The mortgage specialists at Canadalend.com are independent, this means we have access to hundreds of different lenders—lenders that specialize in helping those who have been turned down by traditional lenders access the equity they’ve built up in their homes.

How can we provide better service than traditional lenders? Canada’s tighter lending rules only apply to Canada’s big banks. Alternative lenders, like the ones Canadalend.com work with, are not bound by the same lending rules.

Many of the lenders we work with specialize in providing home equity loans and mortgages to those who are self-employed, have a recent employment history, bruised credit, no credit, unreliable income, or even declared bankruptcy.

To see what kind of home equity loan you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

When it comes to finding a home in or around Toronto in the current real estate climate, it can be easy to get discouraged. Here are some important aspects to look for, procedures to follow, and matters to discuss when searching for a new home.

Set a Firm Budget 

Figuring out how much you can afford to spend is the first step necessary before house hunting, factoring in a down payment and monthly mortgage payments going forward. Most people require a pre-approval from a reputable financial institution to increase their chances of making a quick offer upon finding a home they wish to buy. As bidding wars may ensue, avoid the temptation to increase your spending limit beyond the parameters you and your lender have set. Chances are, it will be rejected anyway.

Keep an Open Mind on Location

As a commuter city, with growing traffic congestion but increasing efforts to improve public transit, many Toronto residents live over an hour away from where they work. If having three bedrooms and two bathrooms, a garage and driveway, backyard, and possibly even space for a rental unit in your garage are top priorities, you may need to compromise on geography.

However, there are many areas impressively developing beyond the central and downtown borders. The city has numerous pockets growing in both popularity and population. Pay attention to schools, restaurants, and other amenities in the neighbourhood, as well.

Find the Right Realtor

A professional real estate agent will have significant expertise, and greater insight into what homes are available, demographics, and price patterns both in buying a new home and—if applicable—selling your current one.

As with most major financial matters, while you may not require the help of a professional, it is often better to receive advice from someone with industry knowledge. Overall, they can help you find the right home within your budget and in a suitable location.

When your finances do not measure up to the standard requirements of being pre-approved for a mortgage, some people may not know where to turn. Acquiring bad credit can be detrimental to various aspects of your life, but especially when striving to obtain a home equity loan.

Although individuals with bad credit may not qualify to go the traditional route with a large bank, there are mortgage brokers, financial institutions and private lenders who work with people in these specific circumstances. They offer enhanced flexibility and freedom, in fact.

It is recommended to check your credit score before seeking a mortgage or home equity loan if you are worried that yours may be low; this can be done free of charge in Canada through TransUnion and Equifax, as well as some newer service companies like Mogo Mortgage and Borrowell. Someone with bad credit typically has a credit score below 600 out of a possible 900 (the lowest is 300).

While technically considered average, a score between 600 and 700 can be eligible for a bad credit mortgage if an individual has solid income sources—which is more difficult for those who work on commission or work for themselves, but still possible to determine a projection of how much you will make based on your averages.

A reputable lender can provide a bad credit mortgage or home equity loan despite their client having a lower credit score. However, it is equally important for that individual not to look far beyond one’s means for a home to avoid being unable to make mortgage or home equity loan payments moving forward.

Someone with bad credit must have solid approval of their property to assure it is in average to good condition. Although individuals can still obtain a bad credit mortgage, they may be sanctioned with greater interest rates and extra fees from lenders and mortgage brokers as a result. Whether good or bad, a person’s credit is considered a direct reflection of how risky they are considered to loan money to.