What to Do When Your Mortgage Application is Denied
Applying for a mortgage –– or any type of loan for that matter –– can be quite stressful if you don’t know your options. With a mortgage, as well as a mortgage renewal and refinancing, you’re getting loans to help purchase a home to live in, so having your application rejected can be terrifying to most people. This is why you should always prepare for your application to be rejected in advance.
In Ontario, home sales were a little under 100,000 in the first five months of 2022, with thousands more still on the market. The average price for sold residential homes in Ontario in May 2022 was almost $1 million. For most people, a mortgage is the only way they can afford to be homeowners in Ontario.
With the increased demand for homes in the province, the number of mortgage applications increases and lenders are more eager to reject applications that don’t meet their criteria. If your mortgage application is rejected, you have other options, which we’ll explore here.
Why Mortgage Applications Get Denied
Most lenders have specific guidelines for approving mortgages. If you fail to meet any one of them, your application will be rejected, including the type of employment you have at the time of the application. Some lenders won’t accept applicants that are not full-time employees.
Poor Credit Score
A very common reason why mortgage applications get rejected is their credit score. Most banks require a credit score over 620 just to be considered for a mortgage with a bank.
Lenders take a risk when they lend someone money, and the lower the credit score of the borrower, the bigger the risk lending to them is. This is why many impose higher interest rates on applicants with poor scores, or they just reject the application.
Lenders weigh not just your credit score, but also your overall debts and income.
To get approved for a mortgage or other home equity loan like a cash-out refinance, less than 44% of your household’s monthly income can be going towards paying debts and no more than 39% for home-related debts.
Even with sufficient income, your application can still get rejected. If you can barely afford the mortgage, any emergencies or unexpected expenses will put you at risk of default. Most lenders will also require you to disclose your sources of income. If you don’t have verifiable proof of how you earn an income, your application will likely be declined.
Being a homeowner doesn’t guarantee you can refinance or renew your mortgage. If your credit score is below 650, you probably won’t be able to refinance with most banks and financial institutions.
Another reason why a mortgage refinancing application may get rejected is low home equity, which is the value of your home minus your debt. You’ll usually need at least 25% equity to get your refinancing request approved. If you have recently lost your job or experienced reduced income, your application will be rejected unless your debt-to-income ratio is low.
The same goes for renewing your mortgage. A mortgage renewal can be rejected by your lender if you experience significant declines in your income or credit score. In both cases taking on lots of debt can also derail these options.
The Value of the Property
If you’re looking to refinance your mortgage, you may not be able to do it because the value of your home dropped. Lenders need to be able to sell the home if a borrower fails to pay the mortgage, so they need the value of the home to be the same or more than your first mortgage in order to approve a renewal or refinancing.
They will naturally send appraisers to your home to check if it’s eligible for another mortgage. If they get a report that says your home is in a bad shape or the local real estate market has dropped in value, your application will likely be rejected
Improve Your Finances
The first thing you should do is improve your financial situation. This starts with working on your credit. You can start by making monthly payments on time for any debts you are currently managing and avoid using more than a third of your available credit for credit cards.
You may need to spend more effort paying off some or all of your current debts to improve your debt-to-income ratio before you can apply for a mortgage or refinance your current one.
Renovate Your Home
You don’t need to spend tens of thousands renovating your home. However, if you want to refinance or take out a second mortgage, you want to do what you can to increase its market value.
It needs to be presentable and without major problems. If you have some extra cash consider upgrading part of your home to increase your home equity. You should also clean your home. That way, when lenders appraise the condition of your home, they wouldn’t be as hesitant to give you a good evaluation and another mortgage.
Find a Mortgage Broker in Ontario
If your application is denied, try to find other lenders with more lenient guidelines. You can also work with a mortgage broker to help you find eligible lenders in your area and negotiate with them to get the best deal possible. They can also help you improve your application so it has a higher chance of being approved.
Find a Guarantor or a Co-signer
If you can’t meet your lenders’ requirements and you’re in a hurry to purchase a home, you can find a guarantor or a co-signer to help you with your application. The guarantor ensures that you will pay your mortgage. If you fail to do so, they will be held accountable for your remaining payments.
This solution works well if you have a friend or family member who is willing to help and has a good credit score. It is important to note that the co-signer will have their names on the property title, the loan application and co-own the property you’re buying or refinancing, which might not be ideal.
Find Other Lending Options in Ontario
If your mortgage application is rejected, there are lots of different mortgage lenders in Ontario that you can work with. One option many turn to are private lenders. They don’t have as many strict guidelines as banks, and they also don’t put as much emphasis on a borrower’s credit score and history.
Private lenders are much more willing to work with different kinds of borrowers than banks. As long as your income can pay the loan, you have a good chance of getting approved. However, they often charge higher interest rates and the mortgage term may be shorter. Private lenders are also a good option if you’re facing power of sale foreclosure. They can help you quickly pay your mortgage and keep your home.
Get Your Mortgage Application Approved Now
If your mortgage or mortgage refinancing application is rejected, the first thing to do is keep calm; there’s always an answer. If you need to purchase a home as soon as possible, then look into private lenders or credit unions to finance your purchase. If you have time, work on improving your financial situation and reapply for a mortgage.
If you need to figure out what to do after your mortgage application is denied then speak with the mortgage brokers at Mortgage Broker Store. Having helped hundreds of borrowers in Ontario to get the loans they need. We can use our network of lenders from across the province to find lenders who can approve your application. Don’t let your dream home slip away, call 416-499-2122 or fill out a form on our website to get your own personalised consultation, free of charge.