Reasons a Lender May Decline Your Mortgage Application
In Canada, applying for a mortgage can be a complex process. Lenders prefer to lend to those who they believe have the ability to repay the loan. This is determined by a variety of factors including credit history, income stability, and the value of the property among others. These are the factors that lenders consider when deciding whether to approve or decline a mortgage application. Understanding these factors can help potential homeowners prepare and increase their chances of securing a mortgage.
One of the most common reasons for a mortgage application being declined is a poor or insufficient credit history. If your credit score isn’t above a certain threshold defined by the lender, then your application may be declined. Similarly, if your credit history shows previous bankruptcies, foreclosures, power of sales, collections, arrears or other such events, this may deter an institutional and more traditional lender from lending capital as it once again represents a higher level of risk than they may be prepared to take.
Similarly, an insufficient credit history may also be unacceptable to certain lenders as they may want to see a consistent record of repayment before they decide to invest in you in the form of a mortgage.
Stable Income and Employment History
Another major factor for a decline may be the level of income you generate versus your current debt obligations and the size of the mortgage you are requesting. Lenders want to see a consistent source of income, as well as job experience that shows you’re capable of earning an adequate income in the future. Having a stable job for at least two years can significantly improve your chances of getting a mortgage. Lenders may also consider the nature of your work, and the health of your industry. If you changed jobs frequently, started a new career, or have a lot of gaps in your work history, lenders may need more proof that you’ll have an ongoing source of income to meet your mortgage payments and other financial obligations.
Insufficient Down Payment
In Canada, a down payment of at least 5% of the purchase price is typically required for a mortgage when applying for a prime mortgage. If your down payment is less than that, or if the funds for your down payment cannot be verified as coming from a legitimate source, your application will be declined. Sources of down payment can be personal savings, gifted down payment from immediate family, investments, proceeds from sale of a property, some lenders even allow borrowed funds to be used for a down payment.
Saving for a down payment can be a challenging but crucial part of the home buying process. Consider setting up a regular savings plan, cutting back on expenses, or exploring programs that assist first-time homebuyers.
Sometimes, the issue may not be with the applicant, but with the property itself. If the lender’s appraisal values the property significantly lower than your offer, or if there are significant issues with the property, your application may be declined. Choosing the right property is an important part of the mortgage process. Consider the location, condition, and value of the property, and ensure it meets the lender’s criteria.
High Debt Levels
If you have high levels of debt, lenders may be concerned about your ability to manage additional debt. This includes credit card debt, student loans, car loans, and any other outstanding debts. Lenders typically use a measure called the Total Debt Service Ratio (TDS) to assess your ability to manage your debts. If the TDS is too high, they may decline the application, or if they decide to approve it, it may be for a lower amount than requested, in which case you will have to come up with a larger down payment.
If you currently owe money to debt collectors, your chances of being declined may increase. Lenders are wary of lending to individuals who have outstanding collections, as this could be a potential sign of payment habit, and could potentially increase the risk of default on the new loan.
It’s important to manage your debts effectively to improve your chances of securing a mortgage. This can involve creating a budget, making regular payments to reduce your debt, and avoiding taking on additional debt.
Mortgage Renewal Declines
Mortgage renewal is another area where you might face challenges. Even if you’ve never missed a mortgage payment, your renewal could get rejected. The banks may review your financial situation, which means looking at your credit report and credit score, prior to offering you a renewal. They might want to see if your employment situation has changed. If you’ve lost your job, your income has been reduced, or you’ve found a new job with a smaller income, they could deny your mortgage renewal.
What to Do If Your Mortgage Renewal Is Denied
If your current lender denies your mortgage renewal, or if you just want to shop around for a better offer, you can try to transfer your mortgage with a new lender. You need to submit a brand new mortgage application and meet the new lender’s borrowing criteria. Working with a mortgage broker can make this process easier, as they have access to multiple lenders, and they are familiar with the qualifying guidelines.
Mortgage Refinance Declines
Some borrowers choose to refinance for variety of reasons to gain access to extra cash. For the reasons mentioned previously, a lender may, or may not approve an application. This is one of the situations that is unique from the previous scenarios of buying or renewing, as it provides a few options not available with the previous two scenarios. If your current lender, or another lender refuses to approve your refinance, you options could be to apply for a second mortgage, secured line of credit, home equity loan. Just don’t max those credit cards. Again, reaching out to a mortgage broker can make the process easier, and less stressful, as they have access to large number of lenders that provide these types of financing. We have seen lenders complete the whole process in about a week’s time.
Since the Office of the Superintendent of Financial Institutions’ mortgage stress test was implemented, there has been a significant influx of Canadians who fail to qualify for a bank mortgage turning to alternative lenders, and even private lenders. While these lenders can provide a lifeline for borrowers who have run out of other financing options, they come with higher costs in the form of higher rates and fees. Always evaluate your options, read the small print, and be prepared to ask questions. Don’t sign anything, unless you truly understand the terms, and know that you are able to make the payments.
We, at the TheBroker.ca Ltd., work with borrowers in all types of situations, and wide spectrum of lenders. Whether you have been declined by a lender, or simply want to know if you can qualify, and for how much, reach out to us at (519) 252-9665 for a free consultation, and let us see if we can be of assistance.