It's a home buyer's worst nightmare - to see their mortgage application denied by their bank. Without help from a bank or mortgage broker, most people cannot afford to buy a home and must go back to renting until they can improve their situation enough to turn the rejection into an acceptance. However, improving is hard to do when you don't know why you were denied a loan in the first place. Here are some of the most common reasons.
Bad Debt to Income Ratio
When banks choose who to lend to, they're looking for people who are likely to be able to pay them back. If you're already drowning under payments for student loans, cars, credit cards, and retail financing, that's a red flag for banks. Some people earn enough to be able to handle these debts and a mortgage too, but the average person does not. If you'd end up paying more than 40% of your income toward debts, you will probably be rejected for a mortgage.
Bad Credit History
Banks also judge your ability to pay by how well you've met your obligations in the past. If you've missed payments on your last home or even on your cell phone bill, this information will go into your credit history and lower your credit score. Bankruptcies, debts referred to collection agencies, and lots of interest building up on unpaid bills is a big no-no. You can check your score and history online with Equifax or Transunion. Aim for 640 or higher for a bank mortgage.
Not Enough Down Payment
In the past, banks allowed borrowers to buy houses with practically nonexistent down payments. But since this led to the collapse of 2008 that ruined even some stocks and bonds, this is no longer done. To qualify for a bank loan, you will have to have saved at least 10% of the purchase price (some federally supported loans can be as low as 3.5%) but 20% or more is ideal and attractive to banks and will reduce the overall repayment cost of your mortgage.
Another common reason for a rejection is that the buyer has chosen to buy a condo for sale in Toronto that is beyond his ability to afford. If the bank thinks you're biting off more than you can chew with a mortgage, you won't be approved. In addition to a 20% down payment, your monthly payments shouldn't be more than 30% of your income.
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