What to do When Your Mortgage Application Gets Denied
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If you’re buying a home in Canada, getting approved for a mortgage is one of the most critical steps. However, if your mortgage application gets denied at closing, it can be a frustrating and stressful experience.
But don’t worry; there are steps you can take to understand why your mortgage application was declined and what you can do to improve your chances of getting approved.
Key Highlights
- Being denied a mortgage application is frustrating and scary, but it doesn’t mean that you will never be able to buy the home of your dreams.
- In Canada, passing the mortgage stress test is crucial. If you don’t pass, it’s unlikely that your mortgage application will be accepted.
- You can do plenty of things before even applying for a mortgage to ensure that your application will be approved.
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Common Reasons Why Your Mortgage Application Was Denied
There are plenty of reasons why your mortgage application was denied. Here are some of the most common factors that most mortgage lenders will consider.
Failing the Mortgage Stress Test
A mortgage stress test is a tool used by Canadian mortgage lenders to determine a borrower’s ability to repay the loan in the event of an interest rate increase.
A borrower may only succeed the stress test if their income is sufficient to cover the monthly payments. Unfortunately, the borrower may have a large amount of debt concerning their income, making it difficult to afford their mortgage payments.
Poor Credit Score or Lack of Credit History
If you have a low credit score, you can work on paying off debt and making on-time payments to improve it. If you have no credit history at all, on the other hand, this would also be a negative to most mortgage lenders because there’s no evidence of being able to make payments consistently.
Insufficient Income
Simply enough, if you don’t make enough of an income to cover the monthly mortgage payments, according to the eyes of a lender, your application will likely be denied.
A Job Change
If, for example, a new job offers you enough income to cover your monthly payments, mortgage lenders may balk at approving your application because, with most new jobs, there’s a three-month probationary period with no guarantees that you’ll be kept on past three months.
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How Often Does An Underwriter Deny A Loan?
How often an underwriter denies a loan depends on factors such as the type of loan, the lender, and the borrower’s financial situation. However, it is common for some applications to be denied.
The denial rate can be influenced by various factors, such as the current economic conditions, the lender’s underwriting guidelines and policies, and the borrower’s creditworthiness and financial history.
For instance, during a recession, the denial rate may be higher overall as underwriters are more cautious about lending money and may be more likely to deny loans to borrowers who don’t meet strict guidelines.
On the other hand, during a strong economy, the denial rate may be lower as underwriters are more willing to take on risk and may be more inclined to approve loans for borrowers with less-than-perfect credit.
Understanding the Mortgage Stress Test & Application Process
The stress test is done by calculating the borrower’s mortgage payment at a higher interest rate, typically the Bank of Canada’s posted rate, which is currently 4.50%, or the lender’s benchmark rate +2%, whichever is greater. This is then compared to the borrower’s income to ensure they can afford the higher payments.
A borrower may only succeed the stress test if their income is sufficient to cover the higher payments. For example, a borrower’s income is $50,000 annually and the bank’s posted rate is 4.50%. If this borrower’s monthly mortgage payments are quoted at over $2,500 per month, this would be considered unaffordable for them, and their application would be denied.
What To Do If Your Mortgage Loan Is Denied
The following examples are just a few of the actions you may take to learn the reasons behind your rejected mortgage application and what you can do to increase your future approval prospects.
Speak with Your Lender
Your mortgage lender can help you identify any other issues that may have contributed to your denial and provide guidance on how to address them. They could also help you find lenders more willing to work with you.
Utilize Methods to Monitor & Build Your Credit Score
It’s essential to regularly monitor your credit score and take steps to address any issues that may be dragging it down. One way to do this is to request a copy of your credit report from the credit bureau. This will give you an idea of what factors may have contributed to your denials, such as a low credit score or a high debt.
Build Credit History
A long and stable credit history can help demonstrate your creditworthiness to lenders. Getting approved for a mortgage loan may be more challenging if you have a short credit history or no credit history. To build your credit history, consider getting a credit card and using it responsibly. Make your payments on time and keep your credit card balance low.
Pay Down or Diversify Debt
Paying down your debt can help lower your debt-to-income ratio, which is a key factor in determining your creditworthiness. Additionally, diversifying your debt can also help, as having a mix of different types of debt, such as a mortgage, a car loan, and a credit card, can indicate to lenders that you’re able to manage multiple types of credit responsibly.
Increase Your Credit Limits
Increasing your credit limits can help improve your credit score and demonstrate to lenders that you can handle a larger amount of credit. Consider asking your credit card issuer for a credit limit increase to increase your credit limits. Be sure to explain that you’re trying to improve your credit score and are looking for a mortgage loan.
Keep Credit Card Utilization Low
High credit card use can be a red flag to some lenders as they might consider you overextending yourself. So make sure to keep your credit card use low by paying off your balances in full each month or paying more than the minimum payment.
Improve Your Finances
Improving your financial situation may seem too simple, but it works. This can include increasing your income, saving money for a down payment, and reducing expenses.
FAQ
Can you reapply for a mortgage after being declined?
Yes, but it’s important to understand why your mortgage application was declined in the first place. Additionally, you wait before reapplying. It’s usually recommended to wait at least 6 months.
How high does your credit score have to be to get a mortgage in Canada?
For a conventional mortgage, lenders typically require a minimum credit score of 600-640. In contrast, for a high-ratio mortgage, the minimum credit score requirements are typically lower, with the CMHC accepting borrowers with a minimum credit score of 600.
Final Thoughts
Mortgage applicants who are prepared for the application process and understand why their applications might be declined are in a much better position to get approved for a mortgage. If you’re looking to buy a home in Canada, start by finding the best mortgage rates. With some preparation and knowledge, you can increase your chances of getting approved for a mortgage and avoid the frustration of having your application denied at closing.
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