This article has been updated from a previous version.
You’ve been scanning the real estate market every day. You’ve already decided what colour you’ll paint your new living room. You are ready to buy a new home. But there’s one thing that can stop you from getting a home and put your ownership fantasies out of reach: a mortgage loan denial.
However, a denial isn’t necessarily a dead end. Consider it more of a hurdle. With some careful planning, you can ensure that you have the necessary funding to buy your new home.
Why your mortgage application might be denied
According to Shawn Stillman, a Toronto-based mortgage broker and co-founder of Mortgage Outlet, a mortgage application needs to be able to stand on four legs: credit score, income, down payment, and collateral — the property itself. If one of these items isn’t up to par, it could be the reason you face a mortgage loan denial.
“A table can’t stand with three legs,” says Stillman. “So, one of those things could be a weakness in your application.”
First things first, your credit score needs to be good. Even a small unpaid balance on a credit card or utility bill can negatively affect it. So, before you start the application process, make sure that all your accounts are paid up and that your credit report is up to date. A credit score between 650 and 749 is considered “good,” while anything over 750 is usually considered “excellent.”
Your income also needs to be adequate to support the mortgage payments — and reported accurately. Stillman says many people don’t actually have enough income, or they mislead the lender on the source of their income. Many people will round up their income out of habit, but you can’t do that on a mortgage application. You must report your salary to the dollar.
“Be factual and upfront. . . so you can get an honest assessment of your situation”
When it comes to the down payment, most people either have it or they don’t. Securing a down payment, even in a cool real estate market, can be a serious challenge. In some Canadian cities, like Toronto and the GTA, it can take an average of 27 years to save for a down payment. If you’re lucky, you may be able to rely on the generosity of family members to help you get the cash needed to buy your home. That said, a down payment cannot be borrowed on mortgages that require you to take out mortgage insurance. Buyers must demonstrate that the money is a gift from an immediate family member and not a loan that has to be repaid.
Lastly, determining the value of your property depends on the relationship with your real estate agent. “You have to rely on your real estate agent to guide you through the process and to make sure you don't overpay and that the property is livable,” says Stillman. A house infested with mold, or a condo on the do-not-lend list (where lenders consider a property to have qualities that can lower its value), is likely going to cause issues with your mortgage application.
Passing the mortgage stress test
To be approved for a mortgage, you also have to pass the mortgage stress test — regardless of how much your down payment is. This test helps lenders determine whether you can pay your mortgage at an interest rate higher than the one you’re being offered.
After all, interest rates can change over time, particularly for those with variable-rate mortgages, which is why it’s crucial to always compare mortgage rates before embarking on a new term If you can’t handle payments at a higher interest rate, your mortgage application may be denied, and you likely won’t be eligible for a mortgage at any federally regulated bank.
Previously, in 2016, Canada’s mortgage stress test applied only to those with a down payment of less than 20% of the home’s purchase price (which renders those mortgages insured). The stress test requires those buyers to show that they can afford increased payments — at either the Bank of Canada’s qualifying rate (which is now 5.25%) or the interest rate offered to them in their contract plus an additional 2% — whichever happens to be higher.
“While you may qualify for a mortgage pre-approval. . . the deal can still fall apart”
As of 2018, however, buyers with down payments of more than 20% (uninsured mortgages), are also required to undergo the same stress test.
If, unfortunately, you’re denied a mortgage loan from a big bank, you can use a private lender. Just be aware that the interest rates with private lenders are likely to be higher. The good news is that even if you’re denied, you can reapply (just ask your lender how long you should wait). You can make approval more likely by ensuring that you’re looking for a house within a realistic budget. That includes accounting for all the other debt you’ll need to service after you buy the house.
How do I know if my mortgage loan application was denied?
Often, a mortgage loan is denied in the underwriting phase. That said, it’s also possible for your mortgage application to be denied when the home sale is closing.
A new job, a new line of credit, or even a new purchase can change your financial situation enough that a mortgage may be declined just as you’re about to cross the finish line. Keep in mind that you should remain as financially stable as possible during the home purchase process and not make any significant financial moves, like buying a new car.
If you’re denied, a lender will let you know one of a few ways: either via email, phone call, or maybe even a mortgage loan denial letter. No matter the format, the notice should include the specific reason(s) why you were denied. However, if it doesn’t, you can call the lender and request additional feedback on why you were denied. This can be especially helpful for when you approach another lender with a mortgage loan application or try to reapply with the same lender.
If you do have to reapply, ensure all your ducks are in a row. “Be factual and upfront with whoever you're dealing with and present an entire picture so you can get an honest assessment of your situation and what you can borrow,” says Stillman.
Can I be denied a mortgage loan even after a pre-approval?
Unfortunately, yes. While you may qualify for a mortgage pre-approval, once the lender takes a closer look at your application, or the actual value of the home, the deal can still fall apart. Again, this is where it’s critical to work with your real estate agent and mortgage broker to ensure that the home is accurately valued and that you can meet all the financial requirements.
Ways to ensure your mortgage application is approved
You can always make a mortgage application stronger. First, be sure that all your information is accurate. If your credit score is low, work on paying off your bills before you apply for a mortgage.
It’s possible you may also have to reassess what kind of home you can afford if you don’t pass the mortgage stress test. If you’re lucky, maybe family or friends can gift you money to increase your down payment. But for some, this might mean saving for a little bit longer.
At the end of the day, it’s important to be straightforward with your mortgage broker and lender, and be honest and realistic as you apply for a mortgage. With that combination, you greatly increase your chances of being approved.
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About the author
H.G. Watson is a writer based in Toronto. Her work has appeared in Chatelaine, Vice, Flare, Maisonneuve, The Walrus and more. You can find her at @hg_watson on Twitter.