This is one of the more disheartening things that you can hear if you’re at the point of applying for a mortgage in Canada. After all the effort you have put into the home-buying process, finally finding something you would like to buy, having that dream seemingly dashed right before the finish line can be heartbreaking. What should you do now? The answer is to take a deep breath and regroup. Being denied a mortgage isn’t the absolute end of your journey; it will be a detour, though, so now is the time to step back and examine things to figure out why you were denied and then how to change your approach so you can get that approval you need. If you’re denied a mortgage in Canada, here are a few things that you can do to help you get across the finish line.
In This Article
- 5 Problems that Seem to Plague All Self-Employed Individuals
- Step #2 – Consider Your Options
- Step #3 – Talk to a Licensed Mortgage Broker
- Conclusion
Step # 1 – Find Out Why
Lenders are required to give you the reason why they declined your application. You should ask for a written explanation of the reasoning. Some of the more common reasons would be that your credit score is too low, your debt ratios don’t fit the lender’s criteria, your income is unstable (hello self-employed people), or there is an issue with the actual property itself.
- If the reason for the rejection is your credit score, make sure that you understand why. You can pull your own credit reports from a service like Equifax or TransUnion. Both of these sites allow you to get free access to your personal credit report. Make sure you review it for anything fraudulent, any mistakes, and outdated information that should be removed and is dragging your score down. If you see something that shouldn’t be there, make sure to dispute the incorrect information right away so you can have it removed and have it stop lowering your credit score.
- If the reason for the refusal is your debt service ratios, you can solve this by focusing on paying down your existing debts (credit lines, credit cards, loans, and student loans, for example) to reduce the amount of debt you have to service and increase your borrowing power.
- If your income is the issue, you need to know that lenders really value stability with your employment. So if you just changed jobs, became self-employed, or are still in the probationary period where you work, lenders view this as a higher level of risk, and some will decline to offer you a loan based on this. Typically in Canada, lenders want to see two years of consistent income history in the same role you are in now to show stability in your income level for their approval.
- It’s not you, it’s the house. Lenders may deny issuing you a mortgage for a variety of reasons based on the property itself. So if you are looking to buy a property that is in poor physical condition, has environmental issues (think of things like an older house that still has a heating oil tank buried in the yard) or if you’re looking at a condominium where the condo corporation is doing a bad job managing their reserve funds, you could be declined your mortgage, These are just examples, but something to remember is that the lender needs to know that your property is in good condition and they can re-sell it if they were forced to foreclose, so they won’t take on a debt secured by something that doesn’t fit that criteria.
Step #2 – Consider Your Options
Once you know why you have been declined, you can now take steps to remedy the situation. For example, if you were refused a mortgage based on the fact that you are trying to buy a house that is on a floodplain, you may need to decide to continue your search for other homes that aren’t built in locations that make the lenders nervous. If it is your credit or debt ratios, you can take the steps you need to improve those as well. Aside from this, you may want to consider a few of these options:
- Consider trying to find a co-signer or a guarantor. If it is your income stability or credit score that was the reason you were declined, finding someone who has a high, stable income and a good credit score as a co-signer can help you get approved. Just remember, your co-signer is on the hook for 100% of the mortgage if you can’t make the payments. As a co-signer, the loan will also appear on your credit report just like it was you that took it out, so it will affect the debt ratios for a co-signer if they try to do anything personally. And once the co-signer isn’t needed any longer, you can’t simply call and have them removed. It will require a refinance that could trigger penalties and legal fees depending on the timing of when you do it.
- Re-evaluate your budget and how much down payment you will make. Being declined may mean that you need to reduce the price range you are looking for homes in or save more money to apply to your down payment. Both of these solutions reduce the amount of the loan you are applying for, and a smaller loan is less risky for a lender.
Step #3 – Talk to a Licensed Mortgage Broker
If you went to your bank to apply for a mortgage and were declined, you need to understand that there is a world of difference between someone who works for a bank as a ‘mortgage specialist’ and someone who is a licensed mortgage broker. A mortgage specialist with your bank only has access to the credit products that their employer (the bank they work for) offers, so sometimes they are simply unable to find a solution for you because your unique situation doesn’t fit perfectly into one of the products that they have access to. Consulting a mortgage broker will be a game-changer for you if you’ve never tried to get a mortgage from anyone other than your bank before. A mortgage broker has access to dozens of different lenders, and many of these lenders will be far more flexible than traditional banks are for what they will and won’t accept for risk levels on mortgages. A mortgage broker also has access to alternative strategies, such as B lenders and other private lenders who, while they may charge higher interest rates, often offer maximum flexibility in the types of loans they are willing to provide. The bottom line is that, as is always the case, we strongly suggest that you speak to a mortgage broker, like the team at Strata Mortgages, rather than simply going to the bank to try and get a mortgage. A mortgage broker has so many more options than your bank will and has a higher likelihood of finding you the financing you need than your bank does.
(As a side tip, definitely avoid going to multiple banks to apply for mortgages with short time periods between the applications. Each application triggers a hit on your credit report that can potentially affect your credit score and make it look to lenders like you are in a panic to try and get a loan, which they really don’t like to see.)
Conclusion
It is understandable that being denied a mortgage in Canada feels like a major setback personally. It is heartbreaking for people to put all of the effort into searching for a home, finding one they like, and then negotiating the price to have all of that upended when a lender says they feel like it’s too risky for them, so they don’t give you the money. Understand, though, while yes, it is a setback, it isn’t a stop sign. By taking the time to find out why you were declined, you can then use that information as a roadmap of sorts to help you figure out your next steps. Whether it is finding a co-signer, adjusting your budget, or focusing on paying down other debts and saving a larger down payment, you know the path that you need to be on to help achieve the overall goal of owning a home. A rejected mortgage application isn’t a final ‘no’; it is a pause in the process that gives you time to restructure things, adjust your strategy, and build a strong foundation for your home purchase. If you have faced a situation where you have been declined for a mortgage and don’t know what to do next, reach out to the team at Strata Mortgages to get the guidance you need to help you achieve your goals.
