Step Back, Assess What Went Wrong, And Develop A Plan
You received your mortgage pre-approval letter, found the perfect home, and learned your offer was accepted. You were all set to take the next steps – closing and moving into your new house – when you got the news: mortgage loan denied.
After a lengthy qualification process and plenty of celebration, unexpected rejection hits like a brick, leaving you frustrated and confused as you consider your next moves. Does this scenario sound all too familiar?
Let’s be clear: a denial is extremely rare if you’ve been pre-approved, as our team collects all necessary income documentation ahead of time. While it can still happen, the reasoning is usually extremely clear.
Unfortunately, sometimes mortgages get denied despite your best efforts.
Mortgage lenders deny applications for dozens of reasons, from easy-to-fix problems like incorrect paperwork to lingering obstacles like unpaid tax liens and new lines of credit.
If your mortgage loan application just got rejected, you may still have options, and a mortgage broker will help you explore them.
The first step: figuring out what went wrong.
Why Denials Happen
So, what factors do lenders consider when they decide to reject applications?
Some of the most common reasons for mortgage loan rejections are related to income or debt.
For example, lenders want to see a debt-to-income ratio below 44 percent, and they prefer at least two years of steady employment in the same workplace or career field.
Your credit history is also significant, but it may be outdated or inaccurate, so it’s important to find out exactly what happened to trigger your rejection.
If you’re taking on an increased debt load or a new car loan too close to your mortgage application, you could be denied even with a pre-approval.
Denials Where You’re Not at Fault
Mortgage denials can occur through no fault of your own, too.
You’ve got good credit, you’re pre-approved, you’re an ideal borrower—so why’d you get a denial? There are two common reasons for these cases:
The property wasn’t acceptable to the lender. Just because you want the property doesn’t mean a lender’s willing to take a chance on it. Mould, major repairs, dry wells, foundation issues… the list goes on. If you’re going with a private lender, they might not see much marketability in your chosen property—an issue if you can’t make mortgage payments and they need to take ownership and re-sell.
Your down payment is less than 20%. These mortgage applications must also be approved by one of Canada’s three major insurers. As such, even if the lender felt comfortable giving you a pre-approval, it doesn’t guarantee the insurer will sign off, too. The primary reason we see a decline with insurers is when they know something the lender or broker doesn’t, like discrepancies on credit reports or issues with the property you might not be aware of.
How Common Are Mortgage Loan Denials?
Big banks must stick to stricter standards than private mortgage lenders, who are often willing to take on more risk for the right property value.
If you were rejected by a bank, you’re not alone; this is more and more common, and the problem may be getting worse.
When the federal “stress test” requirements tightened in 2018, it only took a month for Canada’s mortgage rejection rate to increase by 20 percent.
The Next Steps
After getting denied a mortgage, would-be buyers have more options than you might realize.
For example, if you tried to buy a house in poor shape or an undesirable neighbourhood, the same lender might approve your next mortgage if you find a property with more market value.
And if the rejection was about your finances, it’s important to confirm that they used the correct figures and have a full picture of your situation.
Appeal and Review
Denials are rarely final, and no bank or lender can deny you without reason.
Start by reviewing your denial letter and learning exactly why they rejected your application.
If the reasons are inaccurate or subjective, you have the option to request an appeal. For example, if the property was appraised at a lower price, appeal the appraisal and request a second opinion.
If your credit report is too low because of inaccuracies or recent payments, consider a rescore from a credit reporting agency.
Stop Applying and Start Planning
Of course, most reasons for rejection cannot be erased or fixed in a matter of days.
Instead of trying again with new lenders (who may respond to the same risks with sky-high interest rates), focus on a new strategy.
What can you do to make sure the mortgage approval process goes smoothly next time? Contact a mortgage broker!
How a Mortgage Broker Can Help
If you wouldn’t try to buy a house alone, don’t try to get a mortgage alone either.
Mortgage brokers have experience with every step of the application process, including rejections, appeals, and how to improve your chances of approval. Here are some of the benefits that a broker can provide:
Work with Multiple Lenders
Instead of putting all your eggs in one basket, ask your broker to help you shop around and consider different private lenders and institutions.
Brokers work with a variety of big and small lenders, learning the different preferences and guidelines they use to make their decisions.
They can help you find promising lenders, decide which options are best for your situation, and complete your applications correctly and completely.
Work to Repair Credit
Mortgage brokers understand the ins and outs of qualifying for a mortgage loan, including the most and least valuable parts of your credit report.
If your credit score is the reason for your rejection, a broker will sit down with you and strategize different ways to improve it as quickly as possible. For example, if one credit card is nearly maxed out, it may be worthwhile to pay off a big chunk and stick to the bare minimum for your other monthly payments.
This decreases a very crucial figure: your overall credit utilization ratio.
Improve Debt-to-Income Ratio
Do you devote too much of your income to loans, credit cards, and other debts?
Insightful mortgage brokers may suggest pausing for a few months to restructure your budget and make a dent in your debts. If you cannot decrease your debt-to-income ratio, you may not be able to afford a new mortgage payment just yet.
Are you ready to move on from your denied mortgage loan? Whether you find a more valuable property, a more flexible lender, or a more responsible way to manage your money, your next steps will determine how your next application is received.
An experienced mortgage broker can anticipate what lenders want to see and help you refine your application strategy before trying again.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Dominion Lending Centres, independently owned and operated. Smart Debt broker #12236.