Why are so many mortgage applications declined by the Big Banks?
Getting a mortgage can be hard enough on your nerves, especially with the number of loan options to consider, but getting approved can be even more stressful. Many have the desire to become a homeowner and to feel the “pride of homeownership,” when purchasing a home or property. There are others who already own a home or property, are in the need of reevaluating their current finances, and would like to use their property as security to get the financial help they need. Or - perhaps you own a property with another person and would like to access your equity, and not involve the party. This is referred to a partial interest mortgage and this type of financing can be very complex, but attainable with a few select lenders. All of this sounds straight forward, but getting that mortgage approval through your bank/lender is not easy. In fact, getting your mortgage approved can be extremely time consuming, expensive and still turn out to be a simple turndown. National mortgage loan turndowns have been on the rise the past 2-3 years as a result of a slowing housing market, the introduction and constant amendment of mortgage regulations, and interest rate movements. These market conditions have made it very difficult for potential homebuyers and current homeowners to obtain mortgage financing.
Are you bank declined? Here are some of the most common reasons mortgage loan applications are turned down:
1. Your Credit History
This is one of the most important determining factors the bank will review when considering your mortgage approval. Your credit report reveals to them your credit account details and payment history, which offers them an over-all snapshot of your credit worthiness. Your credit report will also record a credit score, which offers an overall rating of your credit stability. Lenders can see as far back as 6 years + when looking at your credit report. All missed credit payments, bankruptcies, consumer proposals written-off credit accounts are noted within this time period and will impact your efforts negatively when applying for a mortgage. These derogatory items will lower your credit score and serve to be a deterrent for the mortgage approval. However, making your credit payments on time and paying down your outstanding credit balances will have the opposite effect and improve your credit score and chances for approval. Always keep your credit current by making your payments on time and try not to carry any outstanding credit balances. Private mortgage lenders do not focus closely on your credit when approving your mortgage. They offer far more flexibility, options and look very loosely at your credit report.
2. Your Income:
Your income is almost as important as your credit when it comes to a mortgage approval, as the two are tied closely together. If you have gainful employment, you can more than likely manage to pay your bills and credit balances each month without hesitation. This will in turn give you and help maintain a good credit rating. Your income will also determine whether you can afford a mortgage payment, and how much you can pay each month. It’s simple - if you make very little income, the chances of qualifying for a mortgage are pretty remote and vice versa. How long on the job or time in your particular field of work will also be considered along with your income. In addition, income on all levels will require proof. So, it will not be uncommon to be asked for the following forms of proof of income and employment:
Private mortgage lenders require far less income verification with their loan approvals. They tend to offer a make sense approach for their mortgage loan approval requirements.
3. Debt to Income Ratio:
Banks will use certain ratios to determine the affordability of a mortgage for a customer. Your income and current overall outstanding debt figures are used in calculating how much mortgage you can afford. This process can seem complex, so having a mortgage professional guide you through this is important. Banks generally only allow 40% of your gross house income to offset the following monthly expenses:
In other words, 40% of your gross income (before tax income) must cover and not exceed the expenses noted above. That is one long list of expenses, and you will be required to prove that your income will qualify. Private mortgage lenders often do not apply any ratios for the mortgage approval process. Private mortgage lenders are usually only interested in the amount of equity they may be potentially lending on.
4. Property Type:
The type of property and location will also greatly affect the loan approval. For example, a rental property is treated differently than an owner-occupied property. Most lenders will favour an owner-occupied property over rental property because they feel an owner-occupied property is cared for more so than a rental property. This seems to be an industry standard way of thinking by many lenders. Condos & townhouses, being strata properties, have their own distinctions, expenses, regulations and therefore qualify differently. Commercial properties also qualify differently as do the recreational properties which some own as a second home. The amount of money you can borrow, interest rate and legal/loan expenses will vary depending on the property type and the location. Consult with a mortgage professional to know your options and the various mortgage solutions available to you.
5. Your Expectations:
Setting your expectations is key to getting approved for a mortgage loan. Many believe they can handle home ownership, and a mortgage payment would be no problem because they pay rent now. If only that were true. Yes, you would have the mortgage payment, but along with home ownership comes the added expenses of property taxes, heating expenses, strata fees, home repairs, and more each month. This list is long and distinguished and can eat up your available monthly funds very quickly. Home ownership responsibility can be tremendous and very expensive, but isn’t impossible to manage.
Getting advice from a mortgage professional will help you realize what is affordable and will work within your budget, plus have the potential of being approved by a lender. A mortgage broker will assist you with getting this mortgage “pre-approved” and let you know your options. A mortgage broker will take into account the income you earn, the current financial situation you are in, the amount of loan required, the property type and help guide you through the process to ensure you get approved. A veteran mortgage broker will help prepare your application as attractively as possible, and help you get the loan you want. Just remember to be realistic with your expectations.
Bank declined and wondering what to do next? Get in touch with us at Silver Hill Mortgage Corp. to explore your options and greatly increase your chances of getting approved for your mortgage loan request. We will assess your situation with the details you provide such as income, assets and expenses, and counsel you on your personal credit and the required loan ratios - all which will impact your approval. We will explain the various options available in an attempt to tailor the mortgage loan to your expectations. Finally, we will organize the documents you will need for the loan and proceed to submit to the lender for approval.
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Silver Hill Blog
Jim Horvath is the principal broker and director of Silver Hill Mortgage Corp., arranging private mortgage loans in British Columbia for over 25 years.