5 Reasons Why Homebuyers May Not Qualify for the Mortgage Amount they Expected

Homebuyers will often enter the mortgage journey with expectations on the amount they expect to receive, only to be disappointed when they don’t qualify for that amount. This is especially unsettling when they’re already paying a monthly rental amount that exceeds how much the lender will allow their maximum monthly mortgage payment to be.

Inevitably, they always come back with "why" - why do I not qualify for the amount?

There are many factors that can impact their qualification. Homebuyers are often unaware of the details that the lender will take into account when determining their mortgage amount.

As we guide borrowers through the mortgage process, we explain early on what they can expect and answer the “why” question by going through the key points lenders look at.

Here are some of the common reasons why homebuyers don’t always qualify for the amount they expected.

Consumer debt

This is one of the biggest reasons homebuyers are not approved for the mortgage amount they expected. Having high debt payments, such as auto or credit card payments, can seriously hinder one’s borrowing power.

For example, a $400 car payment and just $10,000 of debt on a credit card can lower one’s borrowing power substantially, depending on their income and how it impacts their qualifying debt-to-income ratios. These ratios provide the lender with an idea of how the borrower is balancing their debts and income. Lenders have set out maximums for these ratios.

Interest rate increases

Homebuyers often frame their expectations based on the people they know who have recently bought homes, especially those with a similar profile. However, this doesn’t always create an accurate expectation of the market, especially in an environment like today where mortgage rates have been rising rapidly.

For example, if your friend purchased a home a year ago and rates have gone up substantially since then, your chances of being approved for the amount they were approved for will be less, even if you have the same income and debt levels. The reason is the Stress Test which determines your maximum mortgage borrowing amount based on the current level of interest rates. What you qualified for last year may be different moving forward as rates continue to rise.

Irregular hours/inconsistent income

Lenders are more likely to use your income if you have guaranteed work hours. Even if you regularly work full-time hours, unless those hours are guaranteed, the lender may not be able to include your full income. The same applies to those who receive bonuses or commissions that supplement their income. The lender will most often use your two-year income average, or your most recent income year on your application.

Self-employment

Those who are self-employed generally have a higher gross income compared to their declared net income due to write-offs and how their taxes are filed. While write-offs may be desirable as a way to reduce income and associated taxes, they also reduce the amount of income that can be used on your mortgage application. This means you may not qualify for as much as you expected based on your gross income level.

Divorce

If you are divorced, your borrowing power can decrease based on alimony or child support payments. If you are making the payments, your debt-to-income ratio will increase, reducing your borrowing capacity. If you are receiving child support or alimony, lenders will want to ensure you are receiving that income consistently in order to include it as part of your income. If it is not being received consistently, there is a chance the lender will avoid using this income source.

How we can help

Hopefully this list helps to answer the big “why” question borrowers ask when they can’t qualify for the mortgage amount they were expecting. Keep in mind these are just some of the reasons why borrowers qualify for less than the amount they were expecting.

Another thing to keep in mind is we have the tools and expertise to assist borrowers with solutions that are not available at any of the major banks. For example, we were able to help a family qualify for a little over $200,000 more than at a major bank and the interest rate was less than half a percent higher! This allowed the family to win the bidding war on their dream home. Furthermore, with the way prices have appreciated since they moved in, the fact that they’re paying a little bit higher in interest is of no concern to them. A simple cost vs. benefit financial analysis easily supports this.

No matter your situation, being over-prepared and knowing exactly how a lender will be scrutinizing your application will help greatly with the overall process and improve your odds of securing your next home.

Sleep Easy Financial has access to 90+ mortgage lenders including the big banks. We beat the banks’ mortgages and our services are at no cost to you as we get paid by the lenders. Whether it’s for your next home purchase, mortgage renewal or refinance, our licensed mortgage professionals are committed to getting you your lowest rate so you save as much money as possible. We help you at every stage of the journey and are with you for the life of your mortgage. Be mortgage savvy and let us shop your next mortgage for you. Contact us or schedule your complimentary consultation today.

Sleep Easy Financial mortgage and home financing services are available across Mississauga, Brampton, Cooksville, Malton, Etobicoke, Scarborough, East York, North York, Toronto, Hamilton, Milton, Markham, Woodbridge, Vaughan, Ajax, Pickering, Kitchener, Richmond Hill, Whitby, Oshawa, Guelph, and the surrounding areas. Learn about our mortgage services or get in touch with us.