You are planning to invest in a property and wish to obtain financing from a bank?
Unfortunately, sometimes your mortgage application is turned down by lenders. What should you do if your mortgage application is rejected by lenders? Here are the tips from our brokers!
Buy a property despite a mortgage refusal
Here are 4 solutions proposed by our broker to buy your property despite a mortgage refusal.
Go through an alternative or private lender
A first option to consider if your mortgage loan application is denied is to go through an alternative lender or private lender.
Alternative or private lenders are a good alternative if you have not been successful in obtaining a mortgage through the traditional route. These types of lenders are primarily for borrowers who do not meet the ideal requirements for a traditional loan, such as having a good credit history.
There are two alternatives when your mortgage has been declined.
1- Alternative Lender : Home Trust, Equitable Bank, Haventree Bank, these offer mortgage financing options with 20% down payment for a house, duplex, or triplex occupancy or 25% down payment for a condo purchase.
Their interest rates are typically 1.5 to 2.5% higher than traditional banks, but it is possible to qualify and amortize the loan over 30, or 35 years, with a different calculation of qualifying income.
2- Private lenders: They allow you to get approved for a loan with a down payment between 25 and 35%. Their interest rates are often 4 to 8% higher than traditional banks, this type of option is usually chosen for a short period of time allowing access to property and to pay only the interest on the loan (and not capital + interest).
It should be noted that our brokers will always evaluate with you the exit options as well as their deadlines in order to allow you to eventually return to a “classic” mortgage financing.
The application fee for these lenders (alternative and private) is between 1 and 3%.
Improve your credit score
By choosing this method, you are opting for patience, but also for the wisest solution in the long run! Improving your credit rating to obtain a mortgage takes time, patience and a good strategy.
We therefore advise you to :
- Monitor your payment history and meet your payment obligations
- Use your credit card carefully without exceeding its limit and using no more than 50% of your credit
- Keep your credit account open as long as possible (don’t change credit cards, your credit history and duration is an important factor)
- Limit the number of credit applications
- Have two active lines of credit (two credit cards, a card and a line of credit, a card and a car loan…)
Provide a larger down payment
Another solution is to bring a larger down payment than that required for your mortgage. This will reassure the bank that you will be applying for a smaller loan amount and avoid a mortgage rejection.
Refinance your mortgage
When your current mortgage expires, you are required to renew the outstanding amount of your mortgage for another term.
The advantage of staying with your current lender for renewal is that you don’t have to go through qualification again. So, as long as you have made all the mortgage payments, paid your city and school taxes, during the period, you have no fear of being denied refinancing.
However, even if you escape re-qualification, your current lender will still evaluate your financial situation, including your credit score.
A new lender is more likely to tell you that your mortgage will not be renewed. By going through a new lender, you will also have to go through a mortgage qualification again. This means that your financial situation, income and whether you meet the credit requirements will be rechecked by this new lender. This new lender may then deny your mortgage refinance on the grounds that you have missed payments or that your credit score is too low. It is therefore often better to stay with your current lender when the situation is not in your favor.
You will have to take into account the costs incurred by the new lender in the event of a change.
Our brokers can assist you in this process.
What to do if the mortgage is refused?
If you have just been turned down by a new lender, we recommend contacting your current lender to see if they will be able to renew your mortgage.
If you’ve just been turned down by your current lender, we advise you to look into alternative options with the help of your mortgage broker, such as alternative or private lenders.
Although it is rare for the mortgage renewal process to reach the point of a forced sale of your property (60 day notice), it can happen if your financial situation worsens.
To avoid this, we recommend that you make regular monthly mortgage payments, pay your municipal and school taxes, and monitor your credit score.
Please feel free to contact our brokers for any advice and additional information .
Reasons for a Mortgage Refusal
Here are the reasons why your mortgage application may be declined.
Bad credit record
The credit rating is one of the determining elements for the acceptance of your mortgage application with a bank. Your credit rating varies according to your credit utilization, your debts and the different credits you have taken out.
If you have a score below 600, your mortgage application may be declined.
If your score is above 750, your mortgage application will have a better chance of being accepted at very attractive rates for you.
You do not have a stable job
Even with a good credit score, the bank is reluctant to grant a mortgage to a person who does not have a stable job and income. This is a common problem for self-employed people to obtain a mortgage.
To obtain a mortgage, you must be able to demonstrate the existence of a stable income in order to consolidate your ability to repay the amount granted by the lender.
Insufficient down payment
In Canada, as in Quebec, when you want to buy a house, you have to bring a down payment of 5% to 20% of the purchase price of the house to get a mortgage.
By having the amount for the mortgage down payment already in place , you reassure the bank of your ability to buy and show that it is not a second loan.
If you don’t have enough money for the down payment on the mortgage, the bank may deny your loan for fear that you will take out two loans at the same time, one for the down payment and one for the purchase.
You are out of budget
Before starting the search for your future home, our brokers advise you to evaluate your needs as well as the amount according to your capacities.
Banks will turn down mortgage applications if the purchase price of the home is out of your budget and financial capabilities. Don’t live beyond your means!
Banks use ratios based on your income to assess your ability to buy a home and pay a mortgage. For example, your home expenses must not exceed 32% of your gross income.
In order to avoid any unpleasant surprises, we recommend that you pre-qualify your mortgage before you start looking for a house to find out the maximum amount you can borrow.
The property you want to buy is above market price
Another reason for refusing your mortgage application is if the property you have chosen is well above market price.
The bank may refuse you in this case because if you default, the sale of the property is not enough to pay off your mortgage.
It is therefore important to evaluate your home according to the current real estate market.
We advise you to contact your broker who will be able to assist you in this process.
Type of property
Depending on the type of property, your mortgage will be more easily accepted by your bank at various rates.
You are more likely to be approved for a mortgage on a primary residence rather than a secondary residence.
In addition, the purchase of a second home involves higher rates.
This loan can be accompanied by mortgage insurance to protect your lender from any default on your part. Don’t hesitate to contact our brokers for more information on insurance.
Unpaid taxes
Be aware that the government institutions that deal with taxes are super-priority creditors. Therefore, if you have defaulted on your taxes, you will be turned down by the banks because you have debts that are considered to have priority over your mortgage.
We advise you to keep a regular payment of your taxes.
For further information, we invite you to contact our brokers to assist you in these steps.
