It’s one of the most frustrating situations in real estate.
The buyer has strong income, good credit and reasonable down payment. Everyone expects the deal to go through and then the lender says no.
In most cases, the issue isn’t the buyer. It’s how the file fits within lender debt ratio guidelines. Understanding how ratios work and where they break down is one of the most important parts of structuring a mortgage in today’s Ontario market.
From a surface-level view, many buyers look qualified.
They may have:
But lenders don’t approve mortgages based on income alone. They evaluate how that income supports the full financial picture. That’s where debt ratios come in.
Lenders in Ontario use two primary ratios to assess affordability:
This measures housing costs compared to income. It includes the mortgage payment (based on the stress test rate), property taxes, heating costs and 50% of condo fees (if applicable).
This measures total debt obligations compared to income. It includes everything in GDS, plus all other debts like loans and credit cards.
These ratios are expressed as percentages. If they exceed lender guidelines, the mortgage is declined — regardless of how strong the income appears.
This is where most of the confusion comes from. A buyer can look strong but still fall outside acceptable ratios for several reasons.
Even with good income, a higher purchase price can push housing costs too far relative to earnings.
Car loans, credit cards, and lines of credit all reduce borrowing capacity even if payments feel manageable to the borrower. Lines of credit are assessed assuming they are going to be maxed out.
Condo properties can significantly impact ratios. Even though only 50% of fees are counted, they still add pressure to GDS.
As rates rise, the stress test increases the qualifying payment which raises both GDS and TDS.
Not all income is treated equally. Bonuses and overtime may be averaged. Self employed income is treated differently by different lenders.
Many buyers (and Realtors) rely on pre-approvals that are based on high-level inputs rather than a full file review. That can create a gap between what the buyer expects to qualify for and what a lender will actually approve.
Lenders will often issues a pre-approval that will be subject to review of documents. Then, when the file is formally submitted, ratios can shift and that’s when declines happen. A fully underwritten pre-approval reduces that risk by reviewing income, debts, and structure upfront with documents rather than relying on assumptions.
For that reason, I approach pre-approvals as a full file review rather than a quick estimate.
A ratio issue doesn’t always mean the deal is dead. It means the structure needs to be reviewed. Possible adjustments could include increasing the down payment, closing a line of credit, adjusting the purchase price or changing lenders.
In some cases, alternative or private lending can be used to bridge the gap for a year or two.
Alternative lenders are more flexible when it comes to ratios. They may allow higher GDS/TDS limits, take a broader view of income and focus on overall deal strength rather than strict formulas
This doesn’t mean ignoring risk, it means evaluating the full picture differently. Fining solutions that are often used to stabilize a situation that doesn’t fit within standard guidelines.
Alternative solutions are not one-size-fits-all. They typically involve higher interest rates, lender and broker fees as well as shorter term structures. Alternative solutions should be used strategically, not casually.
This type of structuring can work well for buyers with strong income but high debt. Self-employed borrowers with adjusted income and situations where ratios are just outside guidelines.
It is not suitable for borrowers with no clear path forward or exit strategy.
Any solution outside standard lending should include a clear plan. That may involve paying down debt, stabilizing income, improving credit, and ultimately refinancing back into a conventional mortgage
The goal is not just approval, it’s positioning the borrower for a stronger structure later.
When a buyer is declined despite looking strong, it’s rarely about the person. It’s about how the file fits within lender ratios. And in many cases, that comes down to structure.
If you have a buyer who looked good on paper but doesn’t fit within standard ratios, it’s worth reviewing the file before assuming the deal is dead.