Your local bank isn’t always the most understanding or friendly of institutions. With millions of clients from across the country, they could care less about your current state and personal situation and simply look at the numbers and give you a big green or red stamp and go about their day. It’s important to understand that a red stamp on your mortgage application is normal and doesn’t mean the end of the road for you and your home owning dreams.
In the US, whose real estate markets sees many of the same ebbs and flows as ours across the border, reported that 10.8% of loan applications for a new home were denied and more than 25% of refinancing loan applications were denied in 2018 as per the Federal Bureau of Consumer Financial Protection.
These mortgage lenders can generally be classified into two groups: A lenders and B lenders. “A” lenders can be categorized as the major traditional banking institutions: CIBC, RBC, TD, ScotiaBank and The National Bank of Canada. “B” lenders make up the other major banks of Canada with institutions such as Equitable Bank, Home Capital and Manulife Financial. Both of these types of lenders are governed by stringent federal and provincial legislation and regulations which thus pressures the companies to adopt stricter and stricter unwriting processes (i.e. the process through which a financial institution assesses financial risk).
What may at times occur is applications that would normally have been accepted being rejected in order to comply with risk management protocols. Once you’ve reached that stage, there’s unfortunately nothing you can do to change their mind on the spot. Instead, you have to go back to the drawing board and rebrand yourself or possibly get accepted by an alternative lender source such as with credit unions, trust companies or private lenders.
These alternatives do not need to comply with government legislation and thus can be more laid back when it comes to assessing an individuals’ credit history, income and more. It is always crucial to understand why an application is rejected prior to being able to understand how it can be approved.
Bad Credit History
Quite obvious yet nevertheless a major predictor. The problem with credit history is that it can stay with you for life. Perhaps you made some bad financial decisions in the past and weren’t able to pay off a high-interest loan that in hindsight you shouldn’t have taken. The banks don’t care how long ago it was. Instead, they see your record and make their decision. Maybe your business was hit by a recession and you were forced to foreclose it or declare bankruptcy. No matter how much you’ve improved since then, unfortunately that incident remains a stain on your record until the very end.
Income, specifically a stable history of income is one of the biggest determinants to whether or not you get accepted for your mortgage. For most mortgages, if you can’t prove that your income crosses a certain threshold, then you won’t be accepted for a mortgage. However, it’s not only about your gains but equally as much about your losses. Even if you have a large income, during the underwriting, lenders will assess your income to debt ratio. In general, lenders prefer to see a debt to income ratio less than 36% and with no more than 28% of your income going to financing your mortgage. After reaching the 43% threshold, you’re generally going to see a rejection from A and B lenders.
Problems with your Down Payment
The less money you put down for the home in the initial stages, the less likely you are to be qualified, especially if the down payment is less than 20% of the purchase price. However, even if you do have enough money to meet the requirements for the down payment, there also emerges the problem of verifying the source of your funding for the down payment. All lenders, no matter what creed, are obliged to follow Anti-Money Laundering Laws and determine the source of the funds with which you provide the down payment. If you are not able to do so, you may run into some problems.
There are cases in which you may not be at fault in the slightest yet still get denied. This is due to the mortgage value being insufficient for the appraised value of the property. An appraised value is the value of a real property in the eyes of a qualified investor (i.e. lender). If you have written up your mortgage application and not put in enough stake to match the appraised value of the property, your lender may require you to put in more equity before closing in order to be sure of the financial security of their investment.
If there’s a will, there’s a way and if your mortgage application has been rejected, you’re not going to take that laying down. Let’s see what you can do to change that.
At the end of the day, it’s all a matter of trust. If the lender trusts you to be able to pay back the value of the home that they are investing in, you’ll receive your mortgage. Finding the right advice from the right mortgage expert as well as the right channel from which to receive your mortgage is the difference between boom and bust.