Ever wonder why they opted to call it a stress test? Pretty sure we all have enough stress in our lives, even though obtaining a mortgage can be stressful enough with all the documentation, uncertainty, and proverbial jumping through hoops that is associated with mortgage applications. Despite the poor choice of words in choosing a name, statistics show that the test could disqualify about 10% of buyers, buyers could qualify for up to 20% less than they could just a couple short years ago, and could make it more challenging to refinance your mortgage or obtain a line of credit if needed. It may not be the worst thing in the world however for some of us to adjust our expectations on the home that we want to buy, possibly settle for a smaller home, save more money for a down payment, or delay buying altogether. Those that have felt the pinch the most are probably first-time home buyers or home owners who need to upsize with a growing family. I’m not trying to be the guy that continues to beat the dead horse so I won’t go into great detail about the stress test and it’s potential harmful effects on home ownership, rather as an advocate for increased financial literacy in our world, let’s have a look at a few ways to navigate the process of obtaining a mortgage in this new more challenging mortgage climate we presently find ourselves in.
Pay down debt – remember that the debts that you owe have a direct impact on your ability to qualify for a mortgage. One of the key factors to obtaining credit is your TDSR or Total Debt Service Ratio. This identifier will quantify how much your new mortgage, home ownership, and monthly liability expenses are relative to your income. Of course, it makes sense to pay down debt before applying for a mortgage where able but there are some other things to consider, for instance large car payments. You may only have a few thousand dollars left on your car loan but if your monthly payment on that Range Rover is high it would have a much larger impact on your ability to qualify. It could be reasonable to take some of the funds out of your down payment to pay off the loan – advice to get from your mortgage professional of course. Also, as home buying is becoming more and more difficult, especially for millennials, many are opting for not only financial help from their parents but also for them to act as co-signors for the loan. This sounds like it would significantly increase your chances of qualifying but often can cause detriment as the amount of debt that your co-signors or co-applicants have will also be taken into consideration on the mortgage application.
Adjust your expectations – Be pocket rich and house poor, not the other way around. Difficult financial times can come unexpectedly and when they do they often come in swiftly – maybe that’s why they have the phrase “weathering the storm”. In any event, prudent financial behaviour would be to have at least 3-6 months of expenses in savings prior to buying. We all don’t need the biggest house on the block just cause. I know people who own large homes and have rooms that house nothing else but dust bunnies. Your expectations should be to find shelter first and glamour second. Don’t forget that with buying a home comes many more expenses than just the list price. Property taxes, maintenance, furniture, and a whole list of items that you likely haven’t considered will need to be purchased for upkeep. To own the place in which you live, one must live within their means.
Work with a broker – Yes, I’m both a broker and an advocate for independent, unbiased, financial advice but aside from that there are many reasons why working with a broker can be significantly more impactful to mortgage qualifying and relieve much of the tension associated with the ‘stress test’. Brokers of course know the market very well; good brokers have many years of experience under their belt. Compare a good broker to an acupuncturist – weird I know, stay with me – an acupuncturist knows precisely where on the body to place the needle to relieve pain or discomfort. If the body is the mortgage market and a trained broker places the needle, would you rather have one that only understands one part of the body or all parts? Brokers can find non-traditional lenders for you such as credit unions who are not federally regulated institutions and therefore are not governed by the same rules as most other lenders and banks are. They can also find you lenders who might offer extended amortizations to minimize the impact the stress test will have on how much you qualify for. Often, these non-traditional lenders offer better rates or more flexible repayment terms than their competitors so why not have a well trained, highly qualified individual do the research and negotiating on your behalf, besides the lenders generally pay the broker, not you.
Use the advice above as a compass when travelling through the rough waters of the present-day mortgage market. The key to success for virtually anything in life is education, the same is true for mortgage qualifying.
Happy home hunting!