Denied a Mortgage from Your Bank? You Still Have Options!
Nobody enjoys being denied, especially when it comes to your mortgage. While mortgage applications are approved most of the time, sometimes you can run into bumps along the way that can lead to a mortgage application getting denied.
The good news is that you still have options. Whether you’re at the start of your journey getting a mortgage, you’ve already applied, or you’ve been denied, it’s important to understand the reasons why a mortgage is or isn’t approved. Here are five common reasons you could be denied a mortgage and what you can do about it.
In This Article:
1. You Don’t Meet a Lender’s Mortgage Guidelines
Not meeting a lender’s mortgage guidelines is a common reason for a mortgage application getting declined. Each lender has its own set of mortgage lending guidelines, and some are stricter than others. For example, one lender may approve your mortgage application if you’re on contract, while another one may deny it.
Lenders have guidelines for every aspect of the mortgage application, such as how much income you can use, how to measure how much debt you have, and how to calculate property taxes on new condos. For instance, one lender may say you have to use a city’s mill rate, while another may be okay with estimating 0.75 percent of the condo’s purchase price towards property taxes.
A lack of understanding about a lender’s policies can be the reason your mortgage application gets denied. This can waste valuable time and energy. You don’t want to do that, especially when the property you’re buying is a quick close property and it’s closing in 30 days or less.
If you’ve been denied a mortgage due to a specific lender’s policy, you’ll want to find a lender with a more lenient policy. Rather than visiting banks during COVID times and risking your help, save time and money by using an online mortgage broker, like Breezeful or Homewise.
Online mortgage brokers have relationships with dozens of lenders. By speaking with a knowledgeable mortgage expert there, you can find a lender with the right policy to help you qualify. For example, if your debt ratios are slightly too high, the broker can help find a lender that will accept a lower property tax or heat amount on the property you’re buying.
2. Poor Credit or Lack of Credit
Credit is another common reason for mortgage application denials. A mortgage represents a lot of money, so a lender isn’t going to approve you for potentially hundreds of thousands of dollars unless you have a good track record of borrowing money.
A good track record means that you always make your payments on time and aren’t overextended. Generally, you want to keep the balance on your credit cards below 35 percent of your available credit; otherwise, if it’s consistently over 35 percent, it can drag down your credit score over time. You can run into issues getting your mortgage application approved if you have poor credit or lack credit.
Having poor credit means that you’ve had credit issues in the past. Missing a payment occasionally because you made an honest mistake isn’t the end of the world, as long as the payment is caught up. However, if you regularly miss debt payments, that’s when it can start to cause issues.
Likewise, if you’ve filed for bankruptcy, that’s when your mortgage application can be denied as well. Unless you’ve taken steps to rebuild your credit history, your mortgage application is almost certain to be denied. The same goes for if you’ve filed a consumer proposal.
Sometimes having no credit can be almost as bad as having poor credit. When you have no credit, unless you’re new to Canada, you likely won’t be able to get a mortgage on your own.
If you have poor credit or a lack of credit, you want to take steps to build up your credit. By taking out a credit card for low or bad credit and making all your payments on time, it can go a long way to improving your credit situation.
But improving your credit score takes time. If you don’t have time and want to buy a home now, you’ll need to have a guarantor. A guarantor guarantees to the lender that you’ll make your payments on time. If not, your guarantor can be on the hook for the outstanding payments. Make sure you and your guarantor understand that before signing up.
3. The Property Itself
When you’re pre-approved for a mortgage, many borrowers falsely assume that they can go out and buy any property. That’s simply not true. When you’re pre-approved for a mortgage, it’s assuming that you’re buying a home in good condition and there are no issues. It’s also assuming you’re buying a property that meets the lender’s guidelines.
Depending on the property itself and the borrower, a full appraisal may or may not be required to determine the property’s value and condition for mortgage lending purposes. However, sometimes only an Auto Valuation Model (AVM for short) is used to determine the property’s value without ever visiting the property. If a full appraisal is needed and issues do come up, it’s often something to do with the property’s value or the condition of the property.
A mortgage denial isn’t always because of a negative appraisal but might have to do with a lender’s policies. For example, if you’re buying a home with lake water as the water source, a lot of lenders may not be okay with that and may want municipal or well water.
If the property comes up under value, you might apply with another lender. When you can do a second appraisal, hopefully, the property’s value comes in higher the second time around.
If the property has issues, you might ask the current homeowners to remedy those issues, so you can get the mortgage financing you need.
4. High Debt Ratios
Having too high debt-to-income ratios is another reason for denial. When a lender says that your debt ratios are too high, you’ll want to figure out why.
If it’s because you’re buying a home outside of your price range, you might want to put more money down to help you qualify. If it’s due to a lack of income, you could ask someone like a parent to co-sign. Other times, the mortgage denial can be because you have too much debt.
There are two debt ratios lenders look at for mortgage qualification purposes: the Gross Debt Service (GDS) Ratio and the Total Debt Service (TDS) Ratio. The GDS ratio looks at the liability of the property you want to buy (mortgage payments at the stress test rate, property taxes, heat and condo fees), while the TDS Ratio looks at all of that plus any other debt that you might have, like car payments, credit card debt, or student loan debt. While many people think getting a mortgage while you already have debt is out of the question, it’s still possible to get a mortgage with student loan debt or other types of debt, but getting approved depends more on your GDS ratio. Generally speaking, your GDS ratio needs to be below 39 percent and your TDS Ratio needs to be below 44 percent for you to qualify.
If your TDS Ratio is out of whack, the simplest solution is to first pay down your outstanding balance to start getting out of debt. That will help bring your TDS Ratio in line. However, if you have several outstanding debts, it may not be so clear-cut. That when it makes sense to speak with a mortgage expert who can help you decide the debt that makes the most sense to pay down first.
You might also look into finding a lender who has more lenient debt ratios. Some mortgage lenders qualify you based on the balance that’s outstanding on your lines of credit, while others do it based on the credit limit (even if you aren’t using the full amount), which can make a huge difference. If you don’t qualify at a lender who uses the credit limit, you might try applying at a lender who uses the balance outstanding if it’s a lot lower or $0 owing.
5. Lack of Income or Unstable Employment Situation
If you’re experiencing a lack of income or your job situation is unstable, that’s when your mortgage application can be denied.
The mortgage lender’s number one concern when approving the mortgage is your ability to make your mortgage payments over the term of your mortgage. If you have a full-time salaried permanent job, it’s pretty easy. You just provide a copy of your employment letter and the most recent payslip and you should be good to go.
However, there are instances when your income may be a concern to lenders. For example, when you’re an hourly employee without guaranteed hours, you’re self-employed or you’re a contract employee, that’s when it can be more challenging to get mortgage financing.
Although I said it can be more challenging to get mortgage financing, I didn’t say it was impossible. You want to work with a mortgage broker that knows the policies of lenders. For example, a lender may be okay with you being on contract if you have a history of working in the industry.
If you’re not having any luck getting the lender on board, you might consider having someone you know co-sign on your mortgage. When someone co-signs on your mortgage, you can use their income for mortgage qualification purposes. This can help you afford to spend the amount you wanted to on the property.
Just because your mortgage application has been denied, it doesn’t mean it’s the end of the world. Take some time to breathe and reassess. By not panicking and figuring out why you were denied, you can help remedy the issue and on your next application, get approved sooner.