What If Your Mortgage Is Denied?

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As with any bank loan application, a mortgage application may be followed by an unfavorable outcome. In this case, it is customary to speak of a mortgage refusal. In the case of a refused loan, the lender is obliged to send you a written document stating that your application has been rejected. Despite the fact that your home and possibly other valuable assets are mortgaged, there are several reasons why a financial institution may issue a negative opinion. Find out from your mortgage broker how you can get out of this situation.

Why is a mortgage loan denied?

Before applying for a mortgage loan, it is necessary to know the reasons why a financial institution may refuse to grant financing for your project. Several factors can lead to a mortgage refusal

An unsatisfactory credit record

Financial institutions may refuse you a mortgage loan if you have a poor credit rating. Before deciding on your loan application, the lender looks at your credit history and analyzes your ability to repay. This evaluation allows the bank to know how you manage your debts and credits. A mortgage refusal can be caused by late payments on your previous loans for example or if the amount requested is excessive compared to your ability to repay.

Unstable employment

When applying for a mortgage loan, your credit rating is not the only indicator taken into account by the banks. Your resources are also examined, taking into account their stability. Stable sources of income also justify your ability to repay. Credit agencies and banks may reject your loan application if you do not have a stable income. For example, self-employed people such as artists can often be turned down for a mortgage because of their variable income.

Insufficient down payment

In order to obtain a mortgage loan, it is essential to present a down payment. The amount of the down payment depends on the type of mortgage chosen. For an uninsured mortgage, the down payment is, for example, set at 20% of the purchase price of the home. For an insured mortgage, the minimum down payment is 5% of the purchase price of the home. If you don’t have the minimum down payment, the bank can certainly refuse your financing request.

Overestimating the budget

The purchase price of the house you wish to buy may be too high in relation to your income. To verify this, the lender uses several ratios such as gross debt service and total debt service to determine the amount you can borrow based on your resources. In addition, your file must pass a stress test to measure your ability to repay if the interest rate increases.

What are the alternatives if I am turned down for a mortgage?

Taking out a mortgage and getting turned down is not fatal, although it is not a fun situation. In fact, if you have just been turned down for a mortgage, there are other options available to you, such as taking out a private loan, using a broker, improving your credit rating or building a better credit history.

Applying for a private loan

Compared to a mortgage loan offered by a public financial institution or bank, a private loan may seem more attractive. The first advantage is your credit rating. Your credit score is not the main factor in determining whether or not you are approved for a mortgage. Unlike banks, you have the opportunity to obtain private financing even if your credit score is low. In addition, your financial resources are not verified. Thus, employees with variable income and also the unemployed are eligible with the private lender. That’s not all: with a private creditor, you can negotiate to pay back only the interest at first. This repayment method does not affect the total amount of the debt. Apart from this flexibility, having recourse to a private loan also means being able to access a second loan with the same mortgage, but on condition that the mortgaged property is still your property.

Doing business with a broker

Using the services of a mortgage broker can quickly become necessary in the event of a mortgage refusal. In addition to being an intermediary between you and the bank, the broker also plays the role of negotiator. He also advises you on all aspects of your project in order to find you the best financing offer. He takes care of collecting information from different financial institutions and then compares the interest rates of each offer. With his know-how, he has more capacity to better analyze the banks’ proposals. Beyond the negotiation of the interest rate and the credit repayment conditions, your broker is also a financial security advisor. His personalized support for each borrower is beneficial for the constitution of a good file.

Improving your credit

Contrary to the practice of private lenders, your credit rating is a determining factor if you apply to a bank or a public financial institution. In order to maintain your credit rating or have a good credit score, you need to manage your finances wisely. For example, you can make a budget, keep your credit card balance below 30%, never fall behind on payments, keep old accounts paid off, don’t use up all your credit, avoid multiple loan applications, diversify your credit, use one credit card and be stable in both your housing and your work.

Review the accuracy of your credit report

Your credit report is a document that summarizes your credit history and shows how you manage your debt. Before applying for a mortgage, it is recommended that you check your credit report for errors that could lead to a mortgage rejection. Once you have your file in order, check the essential elements such as your personal information, any erroneous information on your credit card accounts or past loans, negative information that should no longer be on the file, etc. The most important thing is to make sure that information such as payments made on time, but shown as late, is true. If this happens, you should notify your lender of the error and ask the credit bureau to correct your credit report.

Although your mortgage is denied, your situation is far from hopeless. As a mortgage broker, we are here to advise you and guide you in building a convincing file. We are qualified to help you, contact us.