Turned Down for a Mortgage by Your Bank? Why it Happened and What to Do Next

Did you know that in 2019, approximately 10% of mortgage applications in Toronto, Mississauga, and other parts of Canada were declined? This surprising statistic highlights a common challenge faced by many prospective homeowners. As the President and Principal Broker of Clover Mortgage, I've seen firsthand how a mortgage decline can be a disheartening experience. However, it's crucial to understand that a rejection from your bank doesn't spell the end of your homeownership dreams.

In this comprehensive guide, we'll explore the reasons behind mortgage declines, what they mean for you, and most importantly, the steps you can take to secure your dream home despite initial setbacks.

Why Do Mortgage Applications Get Declined?

Before we dive into solutions, let's understand the common reasons why banks might turn down a mortgage application:

1. Poor or Insufficient Credit History : Your credit score and history play a pivotal role in mortgage approvals.
2. Income Issues : This includes insufficient income or employment stability concerns.
3. High Debt Levels : Your existing debt can significantly impact your mortgage eligibility.
4. Inadequate Down Payment : Not having enough saved for a down payment can lead to rejection.
5. Property-Related Problems : Sometimes, the issue lies with the property itself.
6. Documentation Issues : Incomplete or inaccurate applications can result in declines.

Let's break these down further:

1. Credit Concerns

Your credit score is a crucial factor in mortgage approvals. In Canada, credit scores typically range from 300 to 900. Here's a general guideline:

Most traditional lenders prefer scores of 650 or higher. If your score falls below this, it doesn't mean you can't get a mortgage, but you might need to explore alternative lending options .

2. Income and Employment Issues

Lenders want to ensure you can afford your mortgage payments. They typically look at your debt-to-income ratio, which should ideally be below 43%. Additionally, employment stability is crucial. If you've recently changed jobs or have an irregular income (e.g., self-employed or commission-based), this could raise red flags for traditional lenders.

"Income stability is key. Lenders want to see a consistent income stream to ensure you can meet your mortgage obligations." - Gurpartap Dhami, Mortgage Agent Level 1 , M23007025

3. High Debt Levels

Existing debts, such as credit card balances, car loans, or student loans, can significantly impact your mortgage application. Lenders use the Total Debt Service (TDS) ratio to assess your ability to handle a mortgage. Ideally, your TDS should be below 44%.

4. Down Payment Issues

In Canada, the minimum down payment required depends on the home's purchase price:

• 5% for homes $500,000 or less
• 5% for the first $500,000 and 10% for the portion above $500,000
• 20% for homes $1 million or more

If you can't meet these minimums, your application might be declined. Even if you meet the minimum, a larger down payment can improve your chances of approval and potentially secure better mortgage terms.

5. Property Problems

Sometimes, the issue isn't you; it's the property. Lenders may have concerns about:

• Property valuation does not match the loan amount
• The poor condition of the property
• Unique or non-standard properties that are harder to sell

6. Documentation Issues

Incomplete or inaccurate applications can lead to automatic rejections. Common documentation problems include:

• Missing or outdated financial statements
• Incomplete employment history
• Errors in reported income or debts

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Understanding Your Mortgage Decline

If your mortgage application has been declined, it's crucial to understand why. Lenders are obligated to provide reasons for their decision. Here's what you should do:

1. Ask for Specific Reasons : Don't be afraid to ask your lender for detailed explanations.
2. Review Your Credit Report : Obtain a free copy of your credit report and check for any errors.
3. Analyze Your Financial Situation : Look at your income, debts, and savings objectively.

What to Do After a Mortgage Decline

Getting turned down for a mortgage can feel like a setback, but it's not the end of the road. Here are the steps you can take:

1. Address the Issues : Once you know why you were declined, work on addressing those specific problems.
2. Improve Your Credit Score : Pay bills on time, reduce credit card balances, and avoid applying for new credit.
3. Reduce Your Debt : Pay down existing debts to improve your debt-to-income ratio.
4. Save for a Larger Down Payment : A bigger down payment can make you a more attractive borrower.
5. Consider Alternative Lenders : B-lenders or private lenders often have more flexible criteria.
6. Work with a Mortgage Broker : We can help you explore options beyond traditional banks.

The Role of a Mortgage Broker

As a mortgage broker, I can't stress enough the value of professional assistance in navigating mortgage rejections. Here's how we can help:

• Access to Multiple Lenders : We work with various lenders, including those specializing in challenging cases.
• Personalized Solutions : We can tailor solutions to your unique financial situation.
• Expert Guidance : We'll help you understand your options and improve your application.

"A mortgage decline from a bank is often just the beginning of your homebuying journey, not the end. With the right guidance, many of our clients find success with alternative lenders or by improving their applications." - Rick Sekhon, Mortgage Broker , M08008007

Alternative Mortgage Options

If traditional banks have turned you down, consider these alternatives:

1. B-Lenders: These institutions specialize in near-prime mortgages for borrowers with less-than-perfect credit.
2. Private Lenders: While often charging higher interest rates, private lenders can be more flexible with their criteria.
3. Credit Unions: Can be more lenient than big banks, especially for local members.
4. Rent-to-Own Programs: These can be a stepping stone to homeownership.

Here's a comparison of these options:

Improving Your Future Mortgage Prospects

Even if you've been declined, you can take steps to improve your chances for future applications:

1. Build Your Credit : Use credit responsibly and make payments on time.
2. Save Aggressively : Aim for a larger down payment.
3. Stabilize Your Income : If possible, maintain steady employment.
4. Reduce Debt : Pay down existing loans and credit card balances.
5. Educate Yourself : Learn about the mortgage process and requirements.

Government Programs for Homebuyers

Don't forget to explore government programs that might help you become a homeowner:

• First-Time Home Buyer Incentive : A shared equity mortgage program.
• Home Buyers' Plan (HBP): Allows you to withdraw from your RRSP for a home purchase.
• Provincial and Municipal Programs: Many local governments offer assistance to homebuyers.

Common Mistakes to Avoid

When reapplying for a mortgage, avoid these pitfalls:

1. Applying too soon after a rejection without addressing the issues
2. Submitting multiple applications simultaneously, which can hurt your credit score
3. Ignoring the reasons for your initial decline
4. Failing to seek professional advice

Examples of Success

At Clover Mortgage, we've helped numerous clients overcome initial rejections to become homeowners. For example, we have worked with self-employed individuals who were initially turned down due to their irregular income. By working with us to properly document her earnings and exploring B-lender options, we were able to secure their mortgage within three months.

Clover Mortgage has also worked with individuals with low credit scores due to past financial difficulties. We guided these clients through credit repair strategies and connected them with a private lender for a short-term mortgage.

Conclusion

Being turned down for a mortgage can be discouraging, but it's important to remember that it's often just a temporary setback. By understanding the reasons for your decline, taking steps to address any issues, and exploring alternative options, you can still achieve your dream of homeownership.

At Clover Mortgage , we're committed to helping you navigate the complexities of the mortgage process. Whether you need help improving your application, exploring alternative lenders, or understanding your options, we're here to guide you every step of the way.

Remember, a mortgage decline is not a reflection of your worth as a person or your future potential as a homeowner. It's simply a challenge to overcome, and with the right approach and support, you can turn that initial "no" into a resounding "yes."

If you've been declined for a mortgage or are worried about your application, don't hesitate to reach out to us. Let's work together to make your homeownership dreams a reality.

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Turned Down For a Mortgage: Frequently Asked Questions

What does it mean when my mortgage is declined?

A mortgage declined means that a lender has reviewed your application and decided not to approve your loan request. This can happen for various reasons, including poor credit history, insufficient income, high debt levels, or issues with the property you're trying to purchase.

How long should I wait before reapplying for a mortgage loan?

It's generally advisable to wait at least 3-6 months before reapplying for a mortgage loan. This gives you time to address the issues that led to the initial decline, such as improving your credit score or saving for a larger down payment. However, the exact timeframe can vary depending on your specific situation.

Can different mortgage lenders offer different monthly mortgage payments?

Yes, different mortgage lenders can offer different monthly mortgage payments. This variation is due to differences in interest rates, loan terms, and fees. It's always a good idea to shop around and compare offers from multiple lenders to find the best deal for your situation.

What's the difference between a conventional mortgage and other types of mortgages?

A conventional mortgage is a loan that isn't insured or guaranteed by the government. It typically requires a higher credit score and down payment compared to government-backed loans. Other types of mortgages include FHA loans, VA loans, and CMHC-insured mortgages in Canada, which may have more flexible requirements.

How do credit lenders and credit reporting agencies affect my mortgage application?

Credit lenders report your borrowing and repayment history to credit reporting agencies, who then compile this information into your credit report and calculate your credit score. Mortgage lenders use this information to assess your creditworthiness. A good credit history and score can significantly improve your chances of mortgage approval and help you secure better terms.

What is a mortgage stress test and how does it affect my mortgage approval?

The mortgage stress test is a way for lenders to ensure you can still afford your mortgage payments if interest rates rise. In Canada, you need to qualify at either the benchmark rate (which is higher than actual mortgage rates) or your contract rate plus 2%, whichever is higher. This test applies to all federally regulated lenders and can affect the amount you're approved to borrow.

How can I check my credit report with a credit bureau?

You can request a free credit report from Canada's two main credit bureaus, Equifax and TransUnion, once a year. You can do this online, by mail, or by phone. It's a good idea to check your report regularly to ensure accuracy and identify any potential issues that could affect your mortgage application.

Do I need a bank account to get conventional loans?

While it's not always strictly required, having a bank account is typically expected for conventional loans. Lenders want to see your financial history, including income deposits and bill payments. A bank account also provides a way for the lender to set up automatic mortgage payments, which many prefer.

What role does a loan officer play in my mortgage application?

A loan officer is typically the first point of contact at a lending institution. They gather and review your financial information, explain different loan options, and guide you through the application process. They also assess your application and make recommendations on approval, though the final decision usually involves underwriters as well.

If my mortgage application is denied, will the loan officer explain why?

Yes, if your mortgage application is denied, the loan officer or lender is required by law to provide you with the specific reasons for the denial. This is typically done through an "adverse action notice" or a similar document. Understanding these reasons is crucial for addressing issues and improving your chances of approval in the future.

Remember, a mortgage application denied doesn't mean you'll never be able to buy a home. It's an opportunity to understand areas for improvement in your financial profile. At Clover Mortgage, we're here to help you navigate these challenges and find the right mortgage solution for your needs.