Five Reasons Mortgage Applications are Declined - COVID-19, and Beyond!
Mortgage brokers have stories to tell, and while we keep your privacy paramount, we do love to talk amongst ourselves about specific mortgage deals we’ve been able to get approved against all obstacles! Mortgages are complicated (despite what some might try to tell you), but as mortgage brokers, we LOVE the challenge of a complicated mortgage application and the thrill we get when we are able to tell our clients that their mortgage is approved, and the thrill of telling our colleagues how smart we are, is almost as good!
Unfortunately, some circumstances are beyond our control, and we have to give our clients bad news despite all of our knowledge, skill, experience, and the multiple lender products that we’ve applied to get the mortgage approved, it just isn’t possible at that time for the client’s application to be approved.
As mortgage brokers, a declined application is the worst-case scenario, but we can turn it into a more positive message by sharing with our clients what they can do to improve their application so that in the future if they follow our recommendations, they will be able to be approved for a mortgage. I’d like to share FIVE reasons mortgage applications are declined, and I’m recommending how you can change it from DECLINE to APPROVAL.
1. Challenged credit
Bankruptcy, Consumer Proposal, OPD (Orderly Payment of Debt), outstanding collections, current late payment, or multiple late payments within the last twenty-four month period can result in a mortgage decline. Even if the credit score is good enough to qualify for a mortgage, any of the above reporting on your credit report may be the reason your mortgage is declined. Sometimes, a larger down payment is enough to mitigate challenged credit, but with a minimal down payment, you will need to work on credit repair for up to two years in order to improve your credit.
2. Too much debt
Your debt-to-income ratios are an important risk indicator for a mortgage lender. If you have too much debt, you may find it difficult to pay your mortgage amount, and your lender does not want to put you in that position. In such cases, you will have to work on paying down your debt before you get approved for a mortgage. I would suggest that you consider a consolidation loan, or if that isn’t an option, work on paying your highest interest debt first, and then the next highest, and so on.
3. Large auto loans
One thing we mortgage brokers see all of the time is large auto loans. Sometimes, the payment on the vehicle is higher than what their mortgage payment would be! We also see clients who have auto loans in lines of credit. For e.g., instead of a term loan with a monthly payment, which includes principal and interest and has a day for the loan to be paid out in full, the client has a line of credit which requires an interest-only payment. So they pay a minimum payment each month, and five years later, they still owe the same amount as when they purchased the vehicle and the vehicle is then only worth half of what they owe!
Mortgages are declined because a borrower has just recently taken a large auto loan, and this new payment increases the lending risk and lowers the client’s credit score. Mortgages are declined because the borrower prioritized having a nice truck over having a home. To me, this is probably the most disappointing reason why a mortgage is declined. Make your home a priority over your vehicle!
4. Down payment
Down payment can be saved, gifted from an immediate family member, from the sale of your current house, or in some cases borrowed against your existing equity in a home you already own. Down payment can also be borrowed using a specific program, but it requires the debt payment to be included in your debt ratios. For e.g., if you borrow $20,000 for a down payment,
a debt payment of $600 per month ($20,000 x .03) has to be included in your monthly payments in your mortgage application. In addition to that, you have to have secure employment and great credit history to qualify for this program. Saved down payment (vs. borrowed or gifted) strengthens your mortgage application, and of course, the more down payment you have, the
stronger your application. If you are a First Time Buyer, contributing to your RRSP can be one of the best ways to save your down payment. One such program that allows you to withdraw funds from your RRSPs is the Home Buyers’ Plan (HBP). For information about the HBP, click here.
You will be able to use up to $35,000 of your RRSP towards your first home purchase, and each year you save and contribute to your RRSP, you will likely receive a tax return, which you can also put towards your down payment. Many, many mortgage applications are declined because the borrower does not have the required down payment, so if you are a First Time Buyer, consider starting an RRSP and scheduling regular contributions to your RRSP. If you are not a First Time Buyer, the same principle applies, open a separate account, maybe a TFSA or a high-interest savings account, and schedule regular contributions to your down payment savings account. Save! Save! Save!
5. Inconsistent income
Mortgage applications with a consistent income are the strongest applications. For e.g., borrowers with long-term employment in salaried or hourly positions with consistent or increasing income year-over-year make a lender feel really good, really secure, and they want to lend you money for your mortgage. Anything less than long-term, consistent income carries slightly more risk, e.g., new employment, new industry, seasonal employment, self-employment, overtime, or bonus income - all of these types of employment will cause a further review of your income history and your entire application. That doesn’t mean you won’t be approved, but it does mean you may need to qualify on a two year average of your taxable income, and you will need a great mortgage broker to assist you. Because of the COVID-19 Health Crisis and the resulting economic crisis that we’re all facing, we should all expect that qualifying for a mortgage will become even more challenging. Now is the time to hire a mortgage broker to help you plan!
If you’re looking for a mortgage broker to find the best product for your needs, uncover creative financing options, or assist you through a complicated transaction, reach out to Connie Graham.
As a professional mortgage broker in Edmonton, Sherwood Park, Alberta, I have the knowledge and expertise to provide you with the most fitting solution for your mortgage needs. Moreover, since I work with Axiom Mortgage Solutions Inc, I have access to a vast array of specialized mortgage products with the lowest interest rates in the market.
My services include mortgage refinance, mortgage purchase, divorce mortgage, mortgage renewal, move-up mortgage, purchase mortgage, and fixed vs. variable rate. I serve clients across, Sherwood Park, St. Albert, Nisku, Leduc, Stony Plain, Spruce Grove, Fort Saskatchewan, Beaumont, Grande Prairie, Grande Cache, Hinton, Camrose, Windermere, Riverbend, Edmonton South, South Edmonton, Edmonton Southside, West Edmonton, Edmonton Westside, Edmonton West End, North Edmonton, Edmonton Northside, East Edmonton.