If you are on the hunt for a new house, chances are you will require a mortgage to help you finance the purchase of the home. After you have submitted your mortgage application, you will either receive an acceptance or a decline. A decline can be quite sobering to receive, but it is important to stress that it is not the end of the world… or even the end of your home-owning dreams! In 2019, about 10% of applications were declined in Toronto, Mississauga, and other parts of Canada.
Banks and some other mortgage lenders are subject to rigorous underwriting standards and so many applications that may be at the cusp of an acceptance may have to be declined to comply with risk management protocols. If you have received a decline, this article will attempt to explain why it may have happened and what you can do about it now to get approved with an alternative lender now, or to position yourself for an approval with a bank the next time.
Fortunately, there are many alternative lenders such as trust companies, credit unions, and private lenders who do not place as much emphasis on your credit history, income, and other factors that banks and major institutional lenders do. Even if you get turned down by your bank, there is still hope for you to get approved for a mortgage elsewhere.
Why do mortgage applications get declined?
There are several reasons that a mortgage app may have been declined. While a lender is certainly incentivized to lend out the institution’s money as a mortgage, there are times when doing so represents a greater level of risk than the institution is willing to take. Some of these risk factors are presented below:
1. Poor or insufficient credit history
The biggest reason that a lender may decline a prospective borrower for a mortgage is related to credit. When it comes to credit, two factors matter most:
(i) the number of your credit score, and
(ii) your credit history (which should ideally have a strong track record of on-time debt repayments for credit cards, student loans, auto loans etc.).
Let’s start with the credit score. If your score isn’t above a certain threshold (defined by the lender), then your application may be declined as a traditional institutional lender may view it as an outsized level of risk. Similarly, if your credit history shows previous bankruptcies, foreclosures, 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. In the same vein, an insufficient credit history may also be unacceptable to certain lenders as they may want to see a consistent record of repayment before they entrust capital to you in the form of a mortgage.
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. If your income is below the threshold required for a certain level of mortgage, when taking into consideration your other debts, then a lender has no choice but to deny the application. However, even if you do meet the minimum income threshold, a lender may still decline an application. This is due to the perception of income stability that needs to be clear to a lender. If you have recently switched jobs, are on the probationary period at your current job, or have a significant amount of your total income coming from commissions, bonuses, stock options etc. as opposed to a base (cash) salary, a lender may not view that as adequately stable for a mortgage. This is also an important consideration for self-employed professionals. If you are a freelancer or business owner, ensure that you go in with an established history of revenue and income generation to prove your credentials as a credit-worthy borrower.
3. Property problems
It may surprise (or relieve) you to know that the reason your mortgage application got declined had nothing to do with you! During the underwriting process, the lender may find that the appraised value of the property was not sufficient enough for the mortgage being placed on it. In this case, you may be required to put in more equity at closing. Separately, a lender may also be dissatisfied with the condition of the property, in which case the mortgage application will again be declined. If you think you have met the credit and income thresholds listed above, it may be worth chatting with your lender about any reservations they have about the property. If that does not work, your local mortgage broker can likely help you find a solution to most of your mortgage problems.
4. Unverifiable funds
Lenders are obliged by international Anti-Money Laundering (AML) laws to determine the source of funds for the down payment and the sources of funds that get deposited into your bank account for each prospective client. Therefore, if you have received a large gift from a relative or have other sources of income that do not have a direct paper trail to their origination, you may be declined for a mortgage.
5. Debt serviceability
When selecting loan applications to approve, an important consideration is a figure called the debt-to-income ratio. As the name might imply, it is the sum of all the debts you owe, plus the mortgage that you are seeking to take out, divided by the sum of your total income. Therefore, if you have an existing personal loan or have taken on a new debt recently, that debt will be added to the mortgage to provide a hypothetical scenario of your debt-to-income if the mortgage was extended to you. If the lender finds that this ratio is too high, they may determine that it is unfeasible to provide you with the loan.
What can you do about it?
There are a couple things that can be done if you have recently been declined. We have listed them below to help you determine the appropriate next course of action.
1. Get to the underlying reason
Lenders are obliged to tell you why your loan application was not approved. Finding out this information can help you get to the root cause of why your application was denied and/or clarify any issues that you feel were viewed and analyzed in error by the lending officer.
2. Pay down some of your debts
Making repayments to existing debts can improve both your credit score as well as your debt to income ratio, which ultimately makes you a better credit candidate.
3. Increase your income
Yes, this is way easier said than done. However, if you can open up a side hustle such as your own business or a freelancing gig, you can boost your income in the eyes of the lender.
4. Make a bigger down payment to reduce the loan-to-value of the mortgage
By increasing your down payment, you increase the security that the lender has in granting you the mortgage loan. By reducing the risk that the lender takes in the event of the real estate market experiencing a correction and you defaulting on the loan, lowering the loan to value amount will increase the lender’s confidence in extending the mortgage to you.
5. Work with a mortgage broker to help you get approved with another lender
An experienced and knowledgeable mortgage broker has access to many lenders who prefer lending to a variety of mortgage borrowers who the banks regularly turn down. They can help analyze your current income, credit, debt servicing ratios, and the previously declined application and are likely able to find a mortgage lender that will approve you and fund your mortgage quickly.
So, no matter how bleak your situation seems, do not give up just yet. There is usually a solution to your mortgage problem if you look in the right place and get good advice from the right mortgage expert.