Qualifying For a Mortgage Just Got Harder

Between the new stress test, higher interest rates and increasing property values, just qualifying for a mortgage has become quite the challenge. On January 25^thMark Ting discussed his experience applying for a mortgage. Below are the highlights of his interview with CBC’s “On the Coast” host Gloria Macarenko.

What kind of mortgage were you applying for?

I was just trying to increase my credit line mortgage. I’m not planning on buying anything at the moment, but I believe in the adage that you should get lending when you don’t need it because when you need it, you often can’t get it (the same goes for insurance).  And compared to just last year, I found the 2018 lending guidelines a lot stricter.

What kind of problems did you encounter when applying for a mortgage?

My mortgage application wasn’t automatically approved as I expected it would be—instead it was delayed until I filed my 2017 taxes.

I was told that my assets and credit score were great, but the lender had some small concerns about my income.  They based my income on a three year average and, in my case, one of those years (2014) I earned a lot less than the other two years. It was a transition year for me as I quit my job at the Credit Union and decided to take some time off before starting my new job. As a result of the extra time of my earned income was lower than usual in 2014.

In previous years, a temporary drop in income wasn’t a big deal as my broker would just point out all the positive aspects of my application to an underwriter who would then approve it.  Now you either qualify for a mortgage based on their checklist or you don’t; there is no more grey area – particularly for people like me who are self-employed.

Had you been a salaried employee do you think it would have made a difference?

Maybe—maybe not—some lenders use the three year’s average income rule for salaried employees as well so there is always a chance that something might come up.  What if you went on parental leave for part of the year, took a sabbatical, were on disability or just took an extended vacation.  All these legitimate reasons to take time off would reduce your average income and might affect whether you get approved or not. Or you might get approved but not for the amount you need.

That said qualifying as a salaried employee is still quite a bit easier than qualifying as a self-employed or commisioned-based employee.

Usually, in spring, our real estate market heats up, and people need mortgages, any tips for people who are looking to buy?

In hot real estate markets “no subjects” offers become quite commonplace. If you are considering this tactic, you need to be 100% sure that your financing is in place.  This means getting a pre-approval in writing before removing those subjects.  It might sound like common sense, but I know people where this tactic almost backfired. They were confident that they would get approved, made a “no subject” offer which was accepted and it was only after the deal was done that they found out that they didn’t qualify for a large enough mortgage. In the end, they had to cash out all their TFSAs, RRSPs and then still had borrow money from their parents just to get the deal done.

What would have happened if they didn’t have parents to help them out or weren’t willing to cash in all their retirement savings?

They would have a big decision to make.  Let the deal fall through and forfeit their deposit which, in this couple’s case, was $75K or find an alternate non-bank lender who would charge them double or triple the interest rates of a traditional lender.

But even non-bank lenders approvals are harder to come by.  Their business has been booming ever since the banks started turning away so many people. This means they can cherry pick the best borrowers.  All the more reason why you need to know exactly where you stand mortgage-wise BEFORE writing offers because your options might be limited.

In a crunch do you think paying the higher interest rate of non-bank lenders makes sense or would you stay away from them completely?

Between forfeiting your deposit or paying more than double the interest charged by a bank, it often makes sense to pay the extra interest.  For one, you might only have to pay the higher interest for one year—just until you can re-qualify with a bank.  If that’s the case, one years’ worth of higher interest would cost you a lot less than the forfeited deposit.

That’s essentially what would happen to me if I really needed a mortgage.   I’d have to temporarily go to an alternate lender, pay the higher interest rate for a couple of months until my 2017 taxes were filed and then re-apply at the bank.  Once my income is based on my average earnings from the year 2017, 2016 and 2015 the bank assured me that they would welcome me back.

My advice is pretty simple, forfeiting your deposit or paying double or triple the interest, is a lose-lose proposition.  Avoid it by getting those pre-approvals in writing or refrain from making “no subject” offers.

Listen to the full interview here with CBC’s On the Coast. The interview with Mark Ting starts at the 1-hour 27-minute mark.