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What Should I Do If My Mortgage Application is Denied?

Getting denied for a mortgage is more than disheartening – it can have serious financial consequences if you submitted an offer on a home without a financing condition. That’s why we always recommend to get a pre-approval before home shopping.

If you’re even denied when getting a mortgage pre-approval, there are still options that can get you into a home.

 

Find out why you were denied

The first thing you should do after getting denied a mortgage is to find out why. If you don’t know what the lender’s reasons were for denying you, you won’t be able to fix it.

Here are some common reasons for getting denied, and what you should do about it.

 

Didn’t pass the mortgage stress test

This is becoming more common as the new rules for uninsured mortgages came into effect in January 2018.

In order to get approved for a mortgage by a federally-regulated institution (banks) you have to pass the mortgage stress test – even if your down payment is 20% or more.

The mortgage stress test requires you to prove you can afford to make mortgage payments at a rate that’s either 2% higher than your contracted rate, or the Bank of Canada benchmark rate (currently 5.34%), whichever’s higher.

So if you’re applying for the best 5-year fixed mortgage rate of 3.39%, you need to prove you can afford a mortgage rate of 5.39%. If you’re applying for the best 5-year variable mortgage rate of 2.90%, you have to prove you can afford a mortgage rate of 5.34%.

If that sounds bad, that’s because it is. The mortgage stress test reduces affordability by about 20% for most borrowers, and if you aren’t aware of it before applying it can cause you trouble.

 

What to do if you fail the mortgage stress test?

If you were denied a mortgage because of the stress test, you may have to adjust your affordability expectations.

Since the stress test calculations are based on the price of the property and your income, reducing the mortgage amount or increasing your income will allow you to pass.

Increasing your income isn’t very easy, though, and it’s certainly not quick. If you want to get approved for a mortgage now, the faster option is to reduce the mortgage amount you need.

Adjusting your expectations

The fact is that affordability has been reduced because of the stress test, and we all have to adjust our expectations.

With a good credit score and income, you can still be approved easily for a lesser amount. Whether that means looking at similar houses farther away, or smaller houses or condos in the same area is up to personal preference.

Increasing your down payment

Increasing your down payment isn’t necessarily easy either, but bringing a larger down payment means your mortgage will be smaller.

There’s a reason so many parents are helping their kids by gifting part or all of a down payment. A gifted down payment is one of the best ways to quickly increase the amount you can put down.

You could also get a down payment loan, but that doesn’t look as good on your mortgage application as a gift. Don’t forget that you’ll also have to pay the loan back, which will negatively affect your total debt service ratio (TDS), which is part of the mortgage stress test.

Going with a provincially-regulated lender

People often forget that banks aren’t the only businesses that deal in mortgages. Your local credit union may not be as large or nationally-recognized as your bank, but they can and do offer mortgages at competitive rates.

Since the mortgage stress test is only required by federally-regulated institutions, credit unions and other provincial lenders don’t have to apply it when considering your mortgage application.

Many credit unions choose to apply the stress test anyway, as they don’t want to give out mortgages to people who can’t afford a rate increase. But they can choose to set their own benchmark rates or not use it at all, depending on their own calculations and the strength of your application.

Speaking with a mortgage broker

If you went directly to the bank to apply for a mortgage, you’re missing out on the expert advice of a mortgage broker. They may be able to structure your file or negotiate with lenders on your behalf and get you approved – and they don’t charge you anything, so it never hurts to ask.

 

 

Credit too low

Banks like to see credit scores of 680 or higher when applying for a mortgage. You can still be approved at a bank with a slightly lower score if you have high income, but a low enough score, or bankruptcies on your credit report, can cut you off from bank financing.

If your credit is too low to get approved for a mortgage from the bank, you still have options.

What you should do if your credit is low

Improve your credit

This isn’t an immediate fix to your problem, but it is the best.

Higher credit scores not only let you get approved for a mortgage more easily, but also gives you access to the best mortgage rates in Canada. You save time and money by improving your credit score.

The first step to improving your score is getting a copy of your credit report, if you haven’t already. Your report will have the information on why your score is low. Using too much of your available credit, having missed payments, having accounts in collections, and previous bankruptcies or consumer proposals could be dragging your score down.

Some credit problems are fixed by waiting. Negative marks, such as missed payments, fall off your report after a certain length of time, usually 6 - 7 years. That’s a long time!

This process can be accelerated by speaking to the business where you missed a payment. TransUnion and Equifax Canada can only remove a negative mark from your report if it’s incorrect or fraudulent – if it really was you that missed a payment, you have to talk to your creditor.

Asking for them to remove the mark from your report doesn’t always work, but it doesn’t hurt to ask. It’s a lot faster than waiting 7 years.

Disputing incorrect/fraudulent information

Sometimes credit bureaus make mistakes. If you look on your report and see that a credit card that has been paid off for years is reporting as delinquent, then you should let the credit bureaus know. If a negative mark only appears on one credit report, it’s probably a mistake from that credit bureau.

However, if there are a bunch of credit cards or lines of credit that appear on both reports that you never opened, that means someone may have stolen your identity.

It’s your responsibility to make sure that the data on your credit report is correct. TransUnion and Equifax will remove fraudulent information from your credit report, but you have to inform them of the fraud first.

If your identity was stolen, or if the credit bureau made a mistake, having the wrong data removed from your report will boost your score immediately.

 

Income too low

A perfect credit score in Canada is 900. But having a score of 900 doesn’t mean you’ll get approved for any loan that you apply for.

If you want a million dollars, but only make $50,000 a year, you won’t be able to afford the loan payments. Having a perfect credit score won’t help you.

There’s a limit to how low interest rates will go, and bigger loans will always be more expensive than smaller ones at the same interest rate.

A million dollar mortgage at the current best mortgage rate of 2.85% will cost $4,136/month. Even if you make $8,000/month, it’s unlikely you would be approved for that amount of money.

Banks will hesitate to lend money to people who don’t have enough monthly income to service their debts and pay for things like food and gas.

The limit of interest rates means there’s also a limit to the amount you can borrow with your current salary. To be considered “affordable” your housing should cost no more than 32% of your income. With a monthly income of $5,000, you could reasonably afford a mortgage with monthly payments of

$5,000 × 32% = $1,600

At a rate of 2.85%, that would mean a total mortgage amount of around $350,000. Your max purchase price is then roughly 5 – 20% larger than that number, depending on your down payment.

You could always use our affordability calculator to easily see your max purchase price.

 

Down payment too low

You have to have at least 5% of the purchase price as a down payment to buy a home in Canada, but that number gets larger the more expensive a house is.

For properties under $500,000, the required down payment is 5% of the purchase price.

For properties over $1 million, the required down payment is 20% of the purchase price.

The minimum down payment required for homes between $500,000 and $1 million is a bit more complicated. The required down payment is 5% of the first $500,000, and 10% of the value over $500,000. This works out to $25,000 + 10% of the remaining value.

On a $650,000 home, the required down payment is

$25,000 + (10% × $150,000) = $40,000

On a $900,000 home, the required down payment is

$25,000 + (10% × $400,000) = $65,000

So you may be running into an issue if you don’t have enough saved for the down payment.

This isn’t the lender’s fault either – it’s a legal requirement! So what can you do if you don’t have enough saved up?

 

Save up longer

You can increase the size of your down payment by postponing your home purchase by a few months or years. This is the slowest solution, and in some cases may not be practical, but it is the cheapest.

The problems with this method are obvious. If you wait too long, you may miss out on your dream home. Or prices may be rising in your area faster than your ability to save per month, which only prices you out even more.

This strategy really only works when you don’t have a definite plan for buying a home, and aren’t in a rush. Otherwise you’ll want to try…

… getting a gift

Gifted down payments are becoming an increasingly popular way for younger Canadians to get into the housing market.

Parents who have had decades to build up equity in their property or advance in their careers may have enough money to help their children get a leg up when homebuying.

The rules for a gifted down payment are fairly simple. The gift must come from an immediate family member, like parents, grandparents, or siblings, and it must not be expected to be repaid. The gift can be any amount, big or small.

Unfortunately, not everyone has a family that can afford to give tens or even hundreds of thousands of dollars to their kids for a Toronto condo. That’s why you may try…

… getting a down payment loan

Finally, you may turn to a loan to help bolster your down payment. This method doesn’t require you to have any rich relatives, and doesn’t have you waiting for months, but may not be as beneficial as you’d hope.

Lenders don’t like it when borrowers have a lot of debt. You’re already taking out a huge loan (mortgage) and adding more debt to that can cause you to fail the stress test, depending on how much you want to borrow.

 

 

Problems with the property

Sometimes you can do everything right and still not get approved for a mortgage. If the property itself has a serious problem, then lenders may not want to give you any money.

Problems could be structural damage or mold, it not being a residential property, or being inaccessible or not an all-season property (such as non-winterized cottages).

If your mortgage is denied because the property doesn’t meet the lenders requirements, you don’t have many options. You could try and go with a different lender, but they may also deny the application for the same reasons.

Besides, if there is a serious problem with the property, it would be expensive for you to fix as well. Do you really want to take on the added stress and expense?

 

 

Inadequate employment history

It’s no secret that lenders prefer giving money to salaried employees with predictable income than to self-employed individuals whose income can vary drastically.

Unemployed people will fare even worse, as they probably won’t have any income to repay their mortgage unless they have considerable assets.

But even being employed may not be enough. Lenders like to see long periods of steady employment with no gaps, preferably with the same business. If you constantly job hop or have been out of work for a while, you may find it harder to get approved for a mortgage.

This circumstance is out of your control. If you were laid off and had a long job search until you got hired again, that isn’t your fault. Having an employment gap affect your mortgage approval is one of the few things that can’t be fixed with a gift or a loan. You parents can’t gift you 2 years of steady work experience if you have to close in a week.

So your options are limited: you can wait and build up history with your new employer, or you could work with a mortgage broker to see if they can find a lender that will look past your employment.

 

 

 


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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