In Canada, mortgage applications can get denied for a few common reasons. Whether you’re applying for an insured mortgage or traditional mortgage, you can change a few things to improve the likelihood of getting approved.
If you fall into certain situations, your mortgage application may get rejected or denied. It’s one of the reasons why most home buyers are encouraged to work with a mortgage broker. It is completely free, and you benefit from getting access to many rates at once.
As shoppers, we’re always looking for the best deal. Why not look for the best mortgage offer? Just because you bank with a specific bank – it doesn’t typically mean you need to give them your borrowing business. Often times, by going to another bank for your mortgage – you may get a better rate and offer. We will be discussing a few things in this article as per the table of contents.
Reasons Why Mortgage Applications Get Denied
Lack of Credit History
Unfortunately, this is one of those things they don’t teach you in school. Your credit report and history is your financial report card. It tells your lenders about your financial responsibility and habits. A mortgage applicant with no credit history will likely get denied.
You do have options to improve your credit history and build credit, but it is not something you can fix overnight. There are mortgages for bad credit – but it comes at a price.
You can build credit by using credit. Credit is never a bad thing – you need to pay your bills on time, make loan payments on time and be financially responsible. In Canada, you generally need a minimum credit score of 680 to have no qualification issues for your mortgage application.
It’s one of the reasons why planning to buy a home is a one to two year process where you take the time to check off all the boxes.
Have you seen your credit report? It’s very important to see your own credit history and report before the lender does. You can get your credit report and score from Equifax today.
A mortgage application is reviewed by a mortgage underwriter – who takes a deeper dive into the application. They make sure that you meet all the necessary qualifications.
Your employment history is a factor in your mortgage approval. Underwriters will make sure there is a solid employment history/career trend over the last 36 months. The bank or lender wants to confirm that you have the skills and experience to move this level of income for the foreseeable future.
The lender does not want to see someone who is constantly changing from one job to another. It will prompt the underwriter to (1) verify that you do work with the current employer and (2) ask why you are moving from one job to another. Are you being let go from these jobs? Are you not a stable worker? These factors can quickly disqualify your mortgage application.
At the end of the day, the lender wants to see that you earn a stable income and will continue to in the future.
Unacceptable Source of Down Payment
Today, most buyers have funds saved in multiple locations, accounts and sources. If there is a source of fund that is out of the ordinary, it may not qualify. Additionally, if the other source of down payment is another source of debt – it is a big no no!
For example, some young home buyers are now receiving help from their parents to buy their first home. In this case, the lender will ask for a letter from the parents, confirming that this is a free, non-debt gift that is not repayable. The funds need to be traceable back to the parents and must be proved if questioned. ie: do not accept cash gifts, especially if it’s a large sum of money.
A few home buyers will retrieve funds from family member’s line of credits, credit cards and savings accounts. In these cases – the down payment is considered a debt, and it will not qualify.
Lack of Down Payment
If your down payment is not sufficient, it can cause your mortgage application to get denied. When your mortgage is below 20%, the mortgage will need to get insured by CMHC, Canada Guaranty or Sagen (formerly, Genworth Financial).
Once you fall into the insured mortgage category, you will need to meet further guidelines, regarding your financial ratios. You can calculate your mortgage insurance premium and see how much more it will cost you.
In 2020, the CMHC made changes to the rules for an insured mortgage:
- Minimum credit score of 680 for at least one borrower
- Maximum 35% of gross income spending on housing (GDS)
- Maximum 42% of gross income spending on total debt (TDS)
- Down payment must come from personal savings, earnings from sale of a previous property, financial non-repayable gift.
Lack of Savings
You cannot spend all the money you have on your home – you need to have some savings. The lender will make sure that you have money set aside to allow you to cover any short-term emergency.
So, if you think you have just enough to get into a home – it’s likely that you need to save a little more to qualify for your mortgage.
High Income to Debt Ratio
A bank or lender wants to see that you have most of your gross income available to pay for your mortgage. If you current gross income is being used to cover debts – that is a bad sign.
It’s the main reason why lenders are strict about income verifications, pay stubs, income tax returns, and employment letters.
Bad Credit History
Did you have a less than perfect credit history? Did your credit score just increase? It may indicate that your new and improved credit score is just temporary.
If your credit history includes multiple missed payments, late payments, non-payments, R9’s or consumer proposals – you need to explain these to the lender. The lender is interested in hearing if these have been corrected and what you are doing to not fall into this position again.
If you have a history of bad credit, you can still get your mortgage approved – but you will need to be ready to make explanations where needed.
Auto Car Loans
In our experience, this is one of the common reasons why mortgage applications get denied. A car loan can hinder your chances of getting a mortgage, especially if you have an expensive car loan.
The following table looks at how much your mortgage eligibility amount will reduce by adding a car loan to your credit history.
Even if you have a pre-approval for your mortgage – it can still get denied if you’ve got a new car loan.
Bottom line – if you’re gross income is not strong enough for the amount you want to qualify for – please don’t get a car loan. You can definitely get your car loan after you’ve qualified and made your home purchase.
Credit History Changes After Pre-Approval
If you start applying for credit cards, lines of credits and store loans after your pre-approval – your lender can still disqualify you.
When making a new home purchase, avoid large credit changes in any way!
Any unpaid taxes and liens you have against you will cause certain issues when getting a mortgage approval. These are also very common reasons for why a mortgage application can get denied.
Business Loans and Debt
If you are a sole proprietor of your own business; you are considered to be the sole legal person responsible for the business debts.
All business loans and debts will fall under you, and it will be taken into account for your ratios. A business debt or loan can dramatically hinder your chances of getting your mortgage approved.
To pay off your debts, you might want to consider selling your assets or finding a way to incorporate your business. A corporation is it’s own legal entity.
Self-Employed Mortgage Application
Being self-employed is always considered “the dream” – but not everyone thinks it is. A lender reviews a self-employed mortgage application very differently.
When you are a self-employed professional; you are responsible for your own income. If you decide not to work one day, you have no income.
When it comes to employment history, most lenders prefer stability. A self-employed person applying for a home mortgage will need to provide longer records of proof. In most cases, the lender will ask for two years of income verification and work completed.
If you are self employed, you have some lenders who offer mortgages for self-employed business owners.
Errors in your Income Tax Return
If your income tax returns do not line up with your income verification documentation – lenders will reject your mortgage application. You will need to amend the changes to your tax file and re-apply.
It’s always recommended that you work with an experienced mortgage broker – as they will vet all this information prior to the application.
In most banks, the front-facing representatives just fill out a few forms and submit the application. The mortgage officers, funding officers and underwriters in the back-office are the one’s doing the work.
Pass Stress Test
According to federal regulations, all lenders are required to put applications through a stress test. In effect, a lender must see if their applicant will qualify for the current interest rate + 2%. If there are changes in the interest rate after pre-approval – you will be put under the stress test again. This applies to anyone with a down payment that is greater than 20%.
If your down payment is below 20% of the purchase price of the property, there is a stress test completed by the insurer.
Lack of Honesty with Lender
Be completely honest with your lender and provide all documentation required for the pre-approval. If the lender finds out that there have been changes or foul play, they will deny your mortgage application.
You will not be able to re-apply for a mortgage with the same lender if you are found to be lying or conning your lender.
What to do After Being Denied a Mortgage
If your mortgage was denied for the one of the common reasons above, you will likely know from your lender.
Now, before you re-apply to the same bank or different lender – make sure your file is clean. You want to check off all the boxes. If needed, get some free help. From where? An experienced mortgage broker. You do not pay them a single penny, and they’ll ensure you find an option that suits you. After all, they don’t get paid if you don’t get paid.
There may be changes that you need to make to ensure you qualify for a mortgage next time, such as:
- Increasing Income
- Lowering Debt
- Building Credit
- Getting Rid of Loan
- Cleaning Up Tax File
- Increasing Savings
- Better Documentation
Regardless of what the situation is, you can always find a solution. It can take time, but there are options if you get denied for a mortgage. If you are purchasing a new build home; a denied mortgage application can make you think about backing out of a new construction home contract – so always prepare yourself.
We hear too often about people getting their mortgage denied after pre approval, or mortgage denied because of commute. A lender wants as little risk as possible. Yes, they have a lien on your property – but it’s far more than this.
If everyone got a mortgage easily – there one day will be a considerable collapse, much like we’ve seen historically.