The Biggest Challenges of Getting a Mortgage

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Obtaining a mortgage can be a huge milestone for any aspiring homeowner, but the mortgage process does not come without its unique challenges. In this guide, we explore the most common mortgage problems and solutions, as well as the various types of mortgage risks you may encounter. By understanding your debt-to-income ratio, your lender’s qualification criteria, and the best way to navigate timing in the current housing market, you can adequately prepare yourself for the mortgage process, and increase your odds of success.

Understanding Your Debt-to-Income Ratio

One of the most significant factors that lenders consider when evaluating mortgage applications is your debt-to-income (DTI) ratio. This ratio essentially compares your monthly debt payments to your monthly income, and serves as a measure of your financial responsibility. A low DTI ratio indicates to your lender that you are able to make your monthly mortgage payments, and therefore assures them that they will get their money back if they approve you for a loan. Understanding and managing your DTI ratio is essential for securing a mortgage.

Your DTI ratio can be calculated using one of two formulas: the gross debt service ratio (GDS) or the total debt service ratio (TDS).

Your gross debt service ratio represents the percentage of your gross income that is required to fulfill your housing-related payments. This ratio can be calculated by adding up all of your monthly housing expenses (mortgage payments, heating costs, municipal taxes, and 50% of any condo or maintenance fees), and dividing that figure by your gross monthly income.

Typically, you want to aim for a GDS no larger than 39% to get approved with a bank or AAA lender, but alternative lenders, and even some banks, are more flexible than others. Private lenders are the most flexible when it comes to DTI ratio requirements since they lend mainly on the asset.

Your total debt service (TDS) ratio also looks at your gross income in relation to your required housing payments. Unlike the GDS ratio, however, the TDS ratio also considers your other debts. To calculate your TDS ratio, simply add up all of your monthly housing expenses as well as your other monthly debt repayments (car payments, college loans, etc.), and divide by your gross monthly income.

Typically, you want to aim for a TDS no larger than 44% when hoping to get approved by a bank, but as with the GDSR ratio, many lenders have exceptions and this may be subject to change depending on your lender. To learn more, check out our guide on understanding your DTI ratio and its role in your mortgage approval.

Stringent Qualification Criteria & Down Payment Requirements

In Canada, obtaining a mortgage requires navigating through a landscape of stringent qualification criteria and down payment requirements. Here are a few of the most important requirements to consider:

Credit History and Employment Stability:

Oftentimes, lenders place a huge emphasis on credit history and employment stability when evaluating mortgage applications. A strong credit score, which speaks to your creditworthiness and debt repayment history, is crucial for mortgage approval. Lenders typically look for a credit score of 620 or higher to consider an applicant eligible for a mortgage.

Moreover, lenders evaluate the stability and consistency of your income and employment. A steady employment history, typically with at least two years of continuous employment, gives lenders confidence in your ability to meet the demands of mortgage payments in the long term.

In addition to demonstrating the stability of your employment, you will also be required to provide thorough documentation of your income through employment verification, pay stubs, and income tax returns. This documentation allows lenders to assess what size of mortgage you would reasonably be able to pay off.

Down Payment Requirements:

In Canada, the size of the down payment plays a crucial role in mortgage approval. The government has implemented regulations to mitigate risks associated with high loan-to-value ratios.

  • For properties valued up to $500,000, the minimum down payment is 5%
  • For properties valued between $500,000 and $1 million, a 5% down payment is required for the first $500,000, and an additional 10% down payment is required for the portion exceeding $500,000
  • For properties valued above $1 million, a 20% down payment is required

It's important to note that these requirements may vary depending on the type of mortgage and the lender's policies. However, a higher down payment can help you secure more favourable interest rates and decrease your overall mortgage loan amount. To learn more, check out our guide on navigating down payments.

The Challenges of Limited Mortgage Options

The limited availability of mortgage options can pose a significant challenge for aspiring homebuyers, especially in the current real estate market. Given the continuous rate hikes that took place over the past two years, individuals with a low credit score or a history of financial hardships may now face limited choices when it comes to obtaining a mortgage. Traditional lenders often have stringent requirements, leaving these borrowers with few alternatives.

Limited mortgage options from the big banks have caused many aspiring homebuyers to turn to alternative lenders. However, most private lenders hedge the additional risk of lending to someone with a sub-par credit score or an inconsistent income stream by applying higher interest rates, less favourable terms, or stricter repayment policies. This can further exacerbate the challenges faced by individuals with already limited financial resources. Exploring alternative lenders who do not apply harsh penalties, government-backed loan programs (such as the first-time homebuyer’s incentive), or seeking assistance from housing counselling agencies may provide some relief for those facing limited mortgage options.

While these challenges may seem daunting, proper planning, financial management, and seeking professional advice can help individuals overcome them. By being proactive, staying informed, and exploring alternative avenues, prospective homebuyers can increase their chances of obtaining a mortgage and achieving their homeownership dreams. Our Clover Mortgage brokers have experience working with over 60+ lenders, many of which are alternative or private lenders. Together, we can work with you to match you to the perfect lender, and secure the lowest rates and best terms available to you. Contact Clover Mortgage to get started today with a free consultation.