Concert Tickets or Down Payment, Do I Even Need To Ask?
Introduction
A recent social media post caught my attention: a pre-approved buyer spent their down payment on concert tickets and, as a result, couldn’t buy a house.
When I first read that, I thought it must be a joke, or a clickbait to make you go to some website so they can rank higher. But as I read the post there was no link to click on, just a frustrated real estate agent venting about his buyers that he has been working with for some time, and now they blew the savings on a concert ticket. I am thinking those must have been some pricey tickets
This anecdote serves as a stark reminder of how lifestyle choices can impact mortgage approval.
How lifestyle choices can impact mortgage approvals
Lifestyle choices can significantly impact mortgage approval. For instance, spending large amounts on non-essential items, such as concert tickets, or overspending on things we don’t really need, can reduce the funds available for a down payment, thereby affecting the mortgage approval process as lenders often require a certain percentage of the property’s value to be paid upfront. Moreover, such spending habits might raise concerns about the borrower’s ability to manage finances effectively.
Being pre-approved doesn’t always mean that the closing is assured. Pre-approvals have conditions in it, and if any of those conditions change, they might make the pre-approval invalid. Everyone is so quick to blame the lenders, but very few people refuse to accept responsibility and take ownership of their actions that ultimately lead to mortgage declines.
How life changes can impact mortgage approvals
Sometimes it’s not the things we buy that we don’t need, or the things we do, that affect the approval, but the timing of the changes. Life changes can occur at any time and can affect your financial situation. For example, getting a better paying job could be considered a good thing to do. It means higher income, and ultimately a higher standard of living. Or getting a new car, since your old one it’s on its last legs. Or that new furniture for the whole house, I mean it’s not all money upfront. The car is maybe $600 per month, and probably similar amount for the furniture. Also getting married, or divorced could be considered good, depending on how your life was prior to that event. Those are all good things to do or buy. It makes our lives better, and it makes us feel better. So why are they impacting the mortgage approvals?
Let’s take a look at few of these in more detail:
Job Stability
Job stability plays a vital role when it comes to approving a mortgage. Lenders prefer applicants with a stable job history as it indicates a reliable income stream. Therefore, frequent job changes could potentially affect the mortgage approval process. Lenders might perceive job hopping as a sign of instability, which could lead to concerns about the borrower’s ability to maintain a steady income to meet mortgage payments. The same applies to a sudden loss of employment, which can affect your mortgage approval. Even that might not be your fault, it is still a risk for the lender.
Business Ownership
Owning a business can also impact mortgage approval. Lot of people look at starting and owning a business as a natural progression from being an employee to being their own boss, and it should be considered as an improvement. That could be true, for some, but lenders may view self-employment or business ownership differently than traditional employment due to the fluctuating income, increased business liability, and the potential business debts.
Personal Loans and Car Loans / Leases
Taking on additional debt, such as personal loans or car leases, can affect mortgage approval. These additional financial obligations increase your overall debt level, which lenders take into account when assessing your ability to repay the mortgage. High debt levels relative to income, also known as the Total Debt Service Ratio (TDS), can make lenders hesitant as it might indicate potential difficulties in managing additional debt in the form of a mortgage.
Changes To Your Credit
A lack of credit history can impact mortgage approval. Lenders need to see evidence of your ability to repay debts. Without a credit history, providing this evidence can be challenging. Additionally drastic increases to your credit balances or and to your required payment amounts could affect your qualifying ratios. Just because you qualified to be pre-approved before any credit balance or payment changes, doesn’t mean that you will still continue to qualify after those increases. So be mindful of any new borrowing that will lead to a decline.
Changes in Marital Status
Changes in marital status, such as marriage or divorce, can impact mortgage approval. These changes can affect your income level and debt obligations, which are key factors that lenders consider during the approval process. For instance, in the case of a divorce, the division of assets and potential alimony or child support payments could affect your financial situation and thus, your mortgage approval.
Co-signing Loans
Co-signing loans for others can affect your mortgage approval. When you co-sign a loan, you become legally responsible for the debt. This increases your apparent debt obligations and can potentially affect your credit score, both of which are factors in the mortgage approval process. Lenders might view this as an increased risk, which could affect your mortgage terms or even result in a denial of your application.
Late Tax Returns
Filing your tax return on time is important as it confirms the proof of your income. It also establishes any money owing to the government, which can put a lender in a disadvantageous situation if the tax debt resulted in the CRA taking legal actions to recover the debt. For reasons like this lenders require that taxes are filed up to date and any tax balances be paid prior to the mortgage money being advanced.
Interest Rate Changes
Here is one thing that no-one can control. We can’t control the financial markets or the government policies, or the economy. All of these factors play a role in how interest rates are set, and when they change. What we can control is out timing on when we act to those rates. For example a pre-approved buyer has a rate that is guaranteed for a period of up to 120 days. If the rates increased in that period, the pre-approval locks in a rate from any increases, and at same time if the rates dropped the buyer should get a lower rate, either automatically, or by requesting it. So the way to control this particular risk is to have a closing date that is within that particular 120 period, as lenders usually don’t extend the rate guarantee past that period. They may extend the pre-approval, or issue a new one, but it will be at the current market rate, which may or may not be same as in the original pre-approval.
Down Payment Sources
Lenders will want to know the source of your down payment and closing costs. If these funds are borrowed or gifted, it could impact your mortgage approval. There are strict government requirements in Canada that any money used for real estate purchases come from legitimate sources. So if you have saved large amounts as cash instead of keeping it in the bank, and now want to use that money as a down payment, or even just as a deposit, it could be a problem. Simply explaining that it is your money that you have saved as cash, might not be proof enough that the money didn’t come as a proceeds from a crime activity, or that you borrowed it somewhere. Almost every participant in the buying process, such as real estate agents, mortgage brokers, lenders, and lawyers, are required to report any suspicious money activities or face huge fines, as recently seen in the media where a real estate brokerage was fined in the six figure range.
Other Things That Can Impact Approvals
We will mention just a few more, as the list is long. They are:
- Property types,
- Property locations,
- Property ownership structures,
- Property title issues,
- Borrowers debts,
- Borrowers assets, or lack of them,
- Changes in lenders guidelines,
- Changes in the market conditions,
- One thing that we have seen a lot lately is a change in property values, especially when there is a long closing date. In cases of potential value changes, lenders may ask for an updated appraisal closer to the closing dated, to confirm that values have not dropped, and that their mortgage investment is still safe.
- Another big one is underestimating property taxes and condo fees at the time of pre-approval, where they end up buying a different property that has higher taxes and condo fees, which results in increase of qualification ratios.
Conclusion
The mortgage approval process involves a thorough review of various aspects of your financial life. From lifestyle choices to job stability, personal loans, credit history, and many others, where each factor plays a significant role in the final decision. Understanding these factors and planning accordingly can help improve your chances of mortgage approval. If you are ready to take the next step in your mortgage shopping feel free to reach out to us at TheBroker.ca Ltd. We’re here to guide you through the process, and no worries, we will not try to sell you any overpriced concert tickets.
About Us
This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario. If you’re in Ontario and looking for more personalized advice and information, consider booking your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.
At TheBroker.ca Ltd, we are constantly looking for ways to provide helpful advice related to mortgages, current mortgage rates, and more. If you have any questions or need further assistance, we offer a complimentary no-obligation consultation. Feel free to reach out to us at (519) 252-9665 during our regular business hours. Alternatively, you can fill out our contact form, and your message will be promptly emailed to us. We value your time and inquiries, and we make it our priority to respond to all messages within one business day. When reaching out, please provide us with your contact details, a brief overview of your mortgage needs, and the most convenient times for you to have a consultation. We look forward to assisting you with your mortgage.
Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
