There are several reasons that a mortgage app may have been declined. While a
lender is certainly incentivized to lend out the institution’s money as a
mortgage, there are times when doing so represents a greater level of risk than
the institution is willing to take. Some of these risk factors are presented below:
1. Poor or insufficient credit history
The biggest reason that a lender may decline a prospective borrower for a
mortgage is related to credit. When it comes to credit, two factors matter most:
(i) the number of your credit score, and
(ii) your credit history (which should ideally have a strong track record of on-time
debt repayments for credit cards, student loans, auto loans etc.).
Let’s start with the credit score. If your score isn’t above a certain threshold
(defined by the lender), then your application may be declined as a traditional
institutional lender may view it as an outsized level of risk. Similarly, if your
credit history shows previous bankruptcies, foreclosures, arrears or other such
events, this may deter an institutional and more traditional lender from lending
capital as it once again represents a higher level of risk than they may be
prepared to take. In the same vein, an insufficient credit history may also be
unacceptable to certain lenders as they may want to see a consistent record of
repayment before they entrust capital to you in the form of a mortgage.
2. Income
Another major factor for a decline may be the level of income you generate
versus your current debt obligations and the size of the mortgage you are
requesting. If your income is below the threshold required for a certain level of
mortgage, when taking into consideration your other debts, then a lender has no
choice but to deny the application. However, even if you do meet the minimum
income threshold, a lender may still decline an application. This is due to the
perception of income stability that needs to be clear to a lender. If you have
recently switched jobs, are on the probationary period at your current job, or
have a significant amount of your total income coming from commissions,
bonuses, stock options etc. as opposed to a base (cash) salary, a lender may not
view that as adequately stable for a mortgage. This is also an important
consideration for self-employed professionals. If you are a freelancer or business
owner, ensure that you go in with an established history of revenue and income
generation to prove your credentials as a credit-worthy borrower.
3. Property problems
It may surprise (or relieve) you to know that the reason your mortgage
application got declined had nothing to do with you! During the underwriting
process, the lender may find that the appraised value of the property was not
sufficient enough for the mortgage being placed on it. In this case, you may be
required to put in more equity at closing. Separately, a lender may also be
dissatisfied with the condition of the property, in which case the mortgage
application will again be declined. If you think you have met the credit and
income thresholds listed above, it may be worth chatting with your lender about
any reservations they have about the property. If that does not work, your local
mortgage broker can likely help you find a solution to most of your mortgage
problems.
4. Unverifiable funds
Lenders are obliged by international Anti-Money Laundering (AML) laws to
determine the source of funds for the down payment and the sources of funds
that get deposited into your bank account for each prospective client. Therefore,
if you have received a large gift from a relative or have other sources of income
that do not have a direct paper trail to their origination, you may be declined for
a mortgage.
5. Debt serviceability
When selecting loan applications to approve, an important consideration is a
figure called the debt-to-income ratio. As the name might imply, it is the sum of
all the debts you owe, plus the mortgage that you are seeking to take out,
divided by the sum of your total income. Therefore, if you have an existing
personal loan or have taken on a new debt recently, that debt will be added to
the mortgage to provide a hypothetical scenario of your debt-to-income if the
mortgage was extended to you. If the lender finds that this ratio is too high, they
may determine that it is unfeasible to provide you with the loan.
What can you do about it?
There are a couple things that can be done if you have recently been declined.
We have listed them below to help you determine the appropriate next course of
action.
1. Get to the underlying reason
Lenders are obliged to tell you why your loan application was not approved.
Finding out this information can help you get to the root cause of why your
application was denied and/or clarify any issues that you feel were viewed and
analyzed in error by the lending officer.
2. Get to the underlying reason
Making repayments to existing debts can improve both your credit score as well
as your debt to income ratio, which ultimately makes you a better credit
candidate.
3. Get to the underlying reason
Yes, this is way easier said than done. However, if you can open up a side hustle
such as your own business or a freelancing gig, you can boost your income in the
eyes of the lender.
4. Get to the underlying reason
By increasing your down payment, you increase the security that the lender has
in granting you the mortgage loan. By reducing the risk that the lender takes in
the event of the real estate market experiencing a correction and you defaulting
on the loan, lowering the loan to value amount will increase the lender’s
confidence in extending the mortgage to you.
