Why You Can’t Qualify For The Best Mortgage Rate?

Despite fluctuating inflation and interest rates, homebuyers always want the best and most competitive mortgage rates when they are purchasing a home. We get the question all the time, “How can I get the best interest rate?”

Many factors affect your mortgage application and final rate that you receive when you’re being approved for the mortgage. In the Canadian Real Estate Market, these are some common reasons why you would expect to qualify for a higher rate or maybe not qualify at all:

• High levels of consumer debt
• Irregular work hours/ inconsistent income
• Over-utilization of credit
• Active collections

Consumer debt

This is one of the biggest reasons homebuyers are not approved for the best mortgage rates is because they are carrying high levels of consumer debt. This puts their monthly cashflow in a difficult spot and often the need to qualify for a mortgage using alternative lending.
For example, a $700 vehicle payment per moth will decrease your borrowing power by $55,000.00. Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR) provide the lender with an idea of how the borrower is balancing their debts and income. The maximum GDS ratio in Alberta must be under 32-39%, while the TDS ratio must be under 40-44%, depending on the lender.

Pro Tip: If you’re planning on purchasing a car, do that AFTER you purchase a home. Get a great mortgage rate in place and then head to the Ferrari dealership!

Irregular hours/inconsistent income

Lenders are more likely to use your income if you have guaranteed work hours because it portrays less risk. Even if you regularly work full-time hours, unless those hours are guaranteed, the lender may not be able to include your full income to qualify the file. The lender will often use your two-year income average on your application. To try and get out in front of this, consider looking for employment with guaranteed hours or look to purchase a home when you’ve been at your employment for a few years. If you need to use a lender that is willing to take on more risk with your income, it is likely that you will be paying a higher rate for that mortgage.

Pro Tip: If you’re planning on making a job change or moving from a guaranteed full-time role to a causal or contract role, try to wait until after you’ve purchased your home. Check in with your mortgage broker about the best timing for this kind of a move.

Over-utilization of credit

You might think that you are well-prepared to apply for a mortgage because you’ve never missed a payment on your credit card. But, before doing so, you need to ensure that your cards are not maxed out. If you max out your credit card and always pay the minimum interest, it appears that you’re never “getting ahead” in the lender’s eyes. Keeping your balances below 60% of your approved limits is best practice for managing your credit. High limits can negatively affect your credit score and mean that you’re no eligible for triple A mortgage rates.

Pro Tip: You are better off to have 2 credit cards with LIMITS of $10,000 and BALANCES of $5000 than you are to have 1 credit card with a LIMIT and BALANCE of $10,000. I know it’s the same amount of debt, but it looks 100% better if it’s spread across 2 credit cards.

Active collections

Letting anything go to collections is a big “NO NO,” when it comes to paying your bills, but occasionally, something gets missed and it ends up in collections. Sometimes it’s because you closed a credit card with a remaining balance or moved to a new address and didn’t settle your old utility bill. A collection can negatively affect your credit score. Borrowers with credit scores below 600 have to seek alternative lending at higher rates.

Pro Tip: If you have any active collections, they need to be paid off before applying for a mortgage, full stop. The sooner you pay them off, the sooner they will stop affecting your credit score.

How can you get the best interest rate on a mortgage?

You can work to improve your application before you even start!

• Be sure to consistently make payments on credit card balances and bills on time.
• Don’t open new lines of credit right before you apply for a mortgage, and don’t go crazy closing old accounts either – try to keep your credit consistent at this time.
• Repay current debts before taking on more debt to purchase a home. If you currently carry debt, establish a repayment plan you can stick with and work aggressively to pay down your balances.

At Spire, we will guide you to improve your credit score, and ensure your application is the best it can be so you have access to the most competitive rates in the Alberta Real Estate Market.