Getting denied for a mortgage can feel like a major setback, but it doesn’t have to be the end of your homeownership journey. While having your mortgage application declined is rare if you’ve already obtained a pre-approval, there are still plenty of ways to regroup and get approved if you find yourself in this situation.

Understanding why your mortgage application was rejected is the first step in the process. Whether it was due to your credit score, debt levels, employment history, or the property itself, knowing the cause helps you move forward with a strategy that works for your situation. From reviewing your finances to considering alternative lenders, here’s how to turn a rejection into a second chance.

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Key Takeaways

• Understand the reason behind your mortgage application denial and use it as a starting point to improve for your next application.
• Strengthen your position by increasing your down payment or adding a co-borrower if needed to make you more attractive to lenders.
• Explore more flexible lending solutions or revisit your home search to find a property that fits both your finances and lender requirements.

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Why Mortgage Applications Get Denied in Canada

Mortgage approval is based on a combination of personal financial health, property characteristics, and the lender’s specific risk tolerance. If any one of these doesn’t meet expectations, your application might be turned down. 

Some common reasons your mortgage application may be declined include:

• Low credit score: A lower score may indicate a higher risk due to missed payments or high credit utilization.
• High debt service ratios: If your monthly debt payments exceed lender guidelines, typically 39% GDS or 44% TDS required for insured and insurable mortgages, you may not qualify.
• Failing the mortgage stress test: If you don’t qualify at the higher of the benchmark rate (currently 5.25%) or your contract rate plus 2%, lenders won’t approve the loan, even if your regular payments are affordable and within your means. This rule is designed to protect borrowers, ensuring that borrowers can still make payments if there are future rate hikes.
• Unstable or non-traditional employment: Income from freelance, seasonal, or newly self-employed work may be viewed as less reliable, even if your earnings are strong.
• Property issues: Homes that require significant repairs, have zoning issues, possible asbestos, knob and tube electrical wiring, kitec plumbing, are located in remote areas, or have a property valuation that doesn’t match the sales price may be considered high-risk by mortgage insurers and lenders. 

What to Do After a Mortgage Application Denial

Facing rejection can be frustrating, but once you understand the root of the issue, you can begin to address it. Every lender must provide a reason when denying credit if requested. Once you have a reason, this should give you a better understanding of what needs to be rectified to turn the denial into an approval.

Ask Your Lender for an Explanation

If your mortgage application has been declined, ask your lender directly for the reason if it’s not clearly outlined in the denial letter you received. Understanding whether the denial was based on credit score, income, documentation, or the property gives you a clear path forward. 

For example, if you were denied based on the property, you may still be approved with the same lender if you choose a different property. If you were denied due to financial reasons, you can review what you need to work on and try again in the future. 

Review Your Credit Report for Errors

Mistakes happen, and they can be costly. If you were denied because of your credit history, review your report from Equifax or TransUnion carefully. Check your credit report for any incorrect information that may be affecting your credit score and address it promptly. Fixing inaccuracies can raise your score within weeks and make you a more attractive borrower.

Reassess Your Budget and Debts

If debt levels are the issue, examine your overall financial picture. Paying down high-interest debt like credit cards or car loans can improve your Total Debt Service (TDS) and Gross Debt Service (GDS) ratios. Consider consolidating debts or restructuring payments to lower your monthly obligations. 

If you were too ambitious with your purchase price, you may need to look for a lower-priced property with more manageable mortgage payments. This can help bring your debt service ratios within an acceptable range for the lender. 

Important note: Opening or closing accounts on your credit report may temporarily reduce your credit score for up to 6 months. Where possible, it may be more beneficial to include such changes as a condition of financing, so they occur in conjunction with your mortgage application. Do not close a credit account with a remaining balance, or if it’s not required as part of your conditional approval.

Save a Larger Down Payment

If you need to bridge the gap between the appraised value of the property and the mortgage amount, a larger down payment can help. For example, if the property is appraised for less than the purchase price, lenders will base their maximum loan amount on the lower appraised value. The difference must be covered out-of-pocket if you want to be approved. 

A higher down payment can also improve affordability by lowering monthly payments, eliminating mortgage default insurance premiums (if a down payment of 20% or more is made), and allowing you to extend the amortization period up to 30 years. All of these can increase your chances of getting approved if you were previously declined due to high debt service ratios. However, typically lenders lower the debt service ratios when a mortgage is uninsured, requiring a higher income to get approval.

Find a Different Property

Sometimes, the issue isn’t you, it’s the property. Lenders assess risk based on the condition, location, and appraised value of the home. If the property is in poor condition, located in a remote area, or appraises for less than the purchase price, a lender may decide it’s too risky. In these cases, choosing a different home that meets the lender’s and insurer’s lending criteria could help you get approved, even if nothing else changes about your financial profile.

If the subject property is located in a region prone to flooding, the number of lenders willing to offer financing may be limited, as perils insurance may be limited, expensive or not possible. It’s in your best interest to conduct thorough due diligence on the lender to ensure that their lending guidelines cover the location of interest.

Other Options to Consider

Just because you were denied for a mortgage doesn’t mean there are no alternatives. There are many options to consider, and sometimes, adjusting your mortgage expectations, involving a co-borrower, or exploring alternative lenders can open up new possibilities on your homeownership journey.

Get Approved for a Lower Mortgage Amount

If your original mortgage application was too ambitious for your current financial situation, reducing the amount you’re asking to borrow could help. Lowering your target purchase price or increasing your down payment can both bring the total mortgage amount into a more manageable range, improving your debt service ratios and your chances of lender approval.

Add a Co-Borrower

A co-borrower, such as a co-signer or guarantor, can help boost your application, especially if your credit history or income isn’t enough to get approved. This person becomes legally responsible for the mortgage if you can’t pay, so it’s a significant commitment, but it can also mean the difference between approval and denial.

Explore Alternative Lenders

If a traditional lender says no, an alternative lender may be willing to say yes. While rates and fees may be higher, and you’ll need at least a 20% down payment and an exit strategy to move your mortgage to prime lending, they offer a way to homeownership for many borrowers who don’t fit the standard criteria. 

These lenders may also allow:

• Self-employed individuals with complex or variable income
• Stated income or bank statement verification
• Buyers with bruised credit histories
• Clients with high net worth but low reported income

Wait and Strengthen Your Application

Sometimes the smartest thing to do is to put a pause on your plans and wait before trying again. Take the time to improve your credit score, save a larger down payment, reduce your debts or establish a longer track record of stable employment. Even 3 to 6 months of focused financial planning can make a noticeable difference when you reapply for a loan. 

How to Avoid Denial in the Future

Avoiding a future denial starts with understanding what went wrong the first time and taking proactive steps to prevent it from happening again. Whether it’s getting pre-qualified or pre-approved before shopping for a home, there are practical strategies that can help you ensure a smoother mortgage application process. 

Get Pre-Qualified or Pre-Approved 

If you jumped straight into getting a mortgage without first obtaining a pre-approval or pre-qualification and were denied, obtaining these early in the process may help. A mortgage pre-qualification is an informal assessment of your income, employment, debts, and savings to estimate what you can realistically afford. This step helps you establish a realistic budget to avoid surprises down the road. 

A mortgage pre-approval is a detailed assessment of your income, debts, assets, and credit history, involving a hard credit check, to provide a more accurate assessment of how much mortgage you can afford. This process also requires specific property details to assess whether you will be approved for the subject property. Most lenders will also hold your rate for fixed mortgages or discount it from the prime rate for variable mortgages for 90 to 120 days with a pre-approval.

Understand the Stress Test Requirements

All federally regulated lenders are required to apply a mandatory stress test. You must qualify at the higher of the contract rate plus 2% or the benchmark rate set by the Bank of Canada. This ensures you can manage payments even if interest rates rise. This can impact your affordability and chances of getting approved for a mortgage. 

If the stress test is your biggest obstacle, it may be worthwhile to explore a provincially regulated credit union, as they offer financing options that don’t require stress testing. However, they typically come with higher interest rates due to the increased credit risk.

Maintain Steady Employment and Income Reporting

Lenders prefer to see consistency in your employment history. Having at least 2 years in the same job or industry reassures them that your income is stable and reliable. Sudden career changes, gaps in employment history, or switching to self-employed right before applying for a mortgage can cause your application to be declined. 

If you’re self-employed or earning a variable income, be prepared to have extra documentation ready, such as 2 years of income tax returns, Notices of Assessment (NOAs), and/or business financial statements. 

Frequently Asked Questions (FAQ) About Mortgage Applications Denials

Final Thoughts

Getting denied for a mortgage is never easy, but it’s not the end of the road. Having a clear understanding of lending criteria and a solid action plan can turn this temporary setback into a future approval. Whether this means saving more, reducing debts, finding a different property, adjusting your expectations, or working with a different lender, there are many options available that can help you strengthen your position. 

For personalized guidance tailored to your financial situation, speak with a nesto mortgage expert. We’ll help you explore all your options so you can move forward on your homeownership journey with confidence.

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